Our Archive of Articles About Financial Literacy and Other Topics
Buying A Car
April 30, 2008, 8:37 am
Automotive debt article with tips on buying a new car.
The first major purchase most of us make is a car. It is usually a necessity, often a source of pride, and sometimes an object of affection. But, owning and operating a car can also be very costly, taking more and more of the family budget each year. As a result, many of us are keeping our cars longer or buying a used car to reduce its initial cost.
The following information should be useful to you when purchasing a new or used car.
First decide what you want and need. Determine:
- Size—There are many choices, but be realistic. You may want a sports car but need a station wagon. Each has advantages and disadvantages. Analyze the things you like and dislike about your present car. This will help you identify what you want in a car.
- Use—Do you intend to use the car to run errands around town, drive long distances, or commute? Also, make sure the car will physically “fit” you and your family now and in t he future. Will you need room for a child’s car seat, a wheel chair, or extra luggage? Find out if these needs can be met before you buy a car, not afterwards.
- Features—Besides size and use, also consider the features of the car, including size and type of engine, automatic or standard transmission, to name just a few. Given that many decisions that need to be made, you will need all the help you can find. For starters, consult consumer publications, such as “Consumer Reports” that publish yearly updates on repair costs, handling, performance, safety, and cost. Ask dealers for factual information about the models you are considering and talk to mechanics about the frequency and cost of their repair. Talk to friends who own similar cars, and ask insurance agents about the costs of insurance for models you are considering buying. If you sign a contact and find out later that the insurance is outrageous, you are still obliged to fulfill the contract.
- Gas Mileage–The price of gas continues to fluctuate and rise. The smart bet is to assume gas prices will go up and buy a car that gets good mileage.
- Price—How much can you afford to pay? Before you go shopping, visit your bank, credit union or other financial institution to determine how much money you can afford to spend and the loan amount you can qualify for. Of course, if you are fortunate enough to have cash to pay for the car, this visit may not be necessary.
Test Drive Whether you are buying a new or used car, test-drive the one you are considering buying. Do not settle for a drive in a demonstrator or just sitting in a car to “see how it feels.” If you are ordering a car to your specifications, at least give the demonstrator a thorough drive. A thorough test drive should include driving the car over the types of roads you usually travel. Test the car on hills, bumpy roads, highways, and in slow traffic. Can you reach the controls comfortably? Do you have clear vision? The test drive will give vital information regarding the comfort, handling and safety of the car you really cannot get in any other way.
New or Used Car This decision will probably be based on what you want in a car and what you can afford. You can save on the purchase price as well as the insurance by buying a used car. However, your maintenance costs and the interest rate on your loan may be higher on a used car than a new one. Regardless of what type of car you buy, keep in mind that you buy more than transportation when you choose a car. You also get a relationship with maintenance, fuel, and insurance costs; future resale value; varying degrees of occupant safety; and in the case of new cars, a dealer and a warranty. Force yourself to be objective even though buying a car can be an affair of the heart.
Buying a New Car If you decide to buy a new car, you will have a choice of models as well as options. There are many choices of options or “ extras” available with most cars. “Consumer Reports” magazine estimates that these extras can inflate the average new car sticker price by 20 percent.
Comparing the prices of cars from different manufacturers and between models from the same manufacturer often is difficult because standard equipment varies. Specific features such as automatic transmission may be standard equipment on some cars and “option” on others. Standard equipment means that the items already are included in the base sticker price of the car while “ options” are extras you pay for in addition to the base price of the car. The dealer may offer you a “package” of options at a bargain price. The price may indeed be lower than all the options purchased separately, but it will not be a bargain unless you need and want all the individual items.
If you are willing to shop around a little, you may be able to get the options on the car you want without having to special order the car from the factory. Or, a dealer may be willing to trade with another dealer to get the car you want. Usually, you get a better deal by buying from stock. However, if the in-stock car has more options than you want or the one you ordered is delivered with added options be sure that you want and are willing to pay for the added options before you agree to take the car.
Shopping for the right dealer is as important as shopping for the right car. Consult several sources to find out who is a “fair” dealer. Credit unions and banks, as well as the Better Business Bureau and Consumer Protection Office, are often good resources of information about dealers’ reputations because they may know of problems other buyers have has with specific dealers.
When evaluating dealers, consider:
1. The salespeople—are they knowledgeable and helpful?
2. The location—is it convenient?
3. The service department—does it have a good reputation?
4. Size—is the dealership so big that it may be difficult to get personal service?
Salespeople Salespeople can often be a source of anxiety when buying a car. However, if you have done your homework, you will be better informed and prepared to work with salespeople to obtain the car you want at the lowest price. Remember negotiating with a salesperson starts with the initial handshake. He or she will be analyzing you to determine what will make you buy.
Salespeople work on a commission—no sale, no income, and the higher the selling price, the higher their income. They make their money from the amount you agree to pay for a car. Do not feel sorry for a salesperson when you negotiate the price of a car; it is business. You worked hard for your money to buy your car—make your dollar go as far as possible.
Tell the salespersons about your car needs, but do not give him or her a lot of personal information, especially financial. Let him or her know only that you are qualified to buy so they will be willing to work with you. Concentrate on getting the best price for the car, not getting a car for “so much per month.” Since you already know how much you can afford to pay, this temptation should be reduced. One of the most techniques used to try to force a sale is, “ What will it take for you to buy this car from me today?” Impulsively, you give the salesperson some dollar amount. Questions such as these are designed to get you to commit yourself to buying the car even if all the important details have not been discussed or negotiated. In such a setting, you may feel guilty if the salesperson complies with some or all of your requests and you do not buy the car.
You also need to be aware of the advertising techniques that are used. These include:
- Bait and switch—The advertised special is not as nice as the ad described, but a higher priced car that is much nicer is available. The ad brings you to the car lot, but once there, a salesperson attempts to interest you in the higher priced car. Bait and switch advertising is illegal.
- Incentive advertising—A technique that has become popular recently, incentive advertising offers you something special such as a free gift, rebates, discounts, or low-interest rate financing. These offers can be misleading if you think you are getting something free. The incentive often is paid for in an inflated sales price. Before rushing out to take advantage of a sales incentive, evaluate the offer carefully to be sure you are the best deal and car for you.
What is In the Price? Determining a fair price to pay for a new car can be difficult and confusing. Taking a little time to estimate the dealer’s cost will help you arrive at a fair purchase price and allow you to compare different cars and even different dealerships.
Cars often sell below their window “sticker” prices. The sticker price is the same as the manufacturer’s idea of what the dealer’s profit should be. The “manufacturer’s suggested total price” usually is the same as the “manufacturer’s suggested retail price” and may or may not include the cost of the options that have been added.
To add to the confusion, you may also find the “dealer’s suggested retail price.” This price may not be the same as the “manufacturer’s suggested retail price”, the “sticker price”, or the “manufacturer’s suggested total price”. The dealer may start with the manufacturer’s suggested price as a base and add some additional amount or include some extra options to the price. This higher price allows the dealership to negotiate a lower price, and still sell the car above the “manufacturer’s suggested retail price.” Be alert to this sales tactic—you are not necessarily getting a “deal”.
To get the lowest price for a car, determine the approximate invoice price (not he sticker price) of the car. This is usually between 83 and 90 percent of the sticker price. The invoice price is often, but not always, the dealer’s cost. Dealers may also add items they want to the invoice and call them costs. Some of the dealer’s true costs include destination charges, service of the car and the dealer’s overhead costs.
As a rough guide for estimating the invoice price or dealer’s cost: take the total cost (including transportation) listed on the price sticker on the car window and subtract the transportation) listed on the price sticker on the car window and subtract the transportation charge. The n take either 80 percent of the balance (for a full-sized car), 81 percent (for an intermediate-sized car), or 85 percent (for a compact car). Add back the transportation cost. The figures you get will be very close to the dealer’s actual cost. Then, determine hoe much profit you feel the dealer should make. Whatever amount you determine this to be, keep in mind that most salespeople work on a percentage of gross profit. If the amount you offer is too low, the salesperson may not be motivated to help you find the model you want.
When negotiating the price of the car, try to keep the discussion of price simple. Know your figures. Remember, the first thing to negotiate is the lowest total price not he lowest price per month. Determine how much you can afford to spend before you go shopping and do not get talked into something you really cannot afford—even if you think, “the car is for you”.
If you know the invoice price and have allowed for the minimum dealer profit, make your offer at that price. The salesperson may try to explain why all of your figures are either incorrect or incomplete, but he worst that can happen is that the dealership will not sell you a car at your price. If this happens, you must decide whether or not you are willing to pay more for the car at this dealership or be willing to continue shopping for a better deal. In some instances, the extra hassle to save $100 or $200 may not be worth it for you. Or, you may decide you think it is worth it to keep looking. Regardless of what you decide; remember to be happy with your new car you also need to be comfortable with the price you pay.
There are other costs associated with a new car besides the purchase price. Generally, the more you pay for the car, the higher your costs will be for insurance and car maintenance.
The New Car Warranty All new cars come with written warranties, which provide important buyer protection. The terms of warranties can differ so compare different manufacturer’s warranties before you buy a car.
While claims made by a salesperson, dealer, or manufacturer may become warranties, they are difficult to prove unless they are written. Ask that all claims be put in writing, preferably on the contract itself.
Have all the work done on your car documented by the service or repair facility on a repair invoice and keep these records. If you do your own maintenance, keep records of it. Such records will show that you have cared for your car as required by the warranty and owner’s manual.
Buying a Used Car Used cars can be real bargains if you know what to look for. The average used car costs half of what a new car costs, so it is not surprising that three out of four car buyers purchase used cars. Sometimes people trade in or sell their car just before it is ready to fall apart. Other individuals get rid of their car when it is in perfectly good condition because they want a change, to avoid any problems, or enjoy the prestige of owning a new model car. The trick is finding a used car in your price range that is in good running condition.
Before you shop it is good to get an idea of the price you can expect to find on the model you want. You also need to determine how much you can afford to pay. This will help you evaluate each car realistically before you buy. To get an idea of price, check newspaper ads, consumer magazines, Kelly Blue Book, or a used car guide usually available at libraries or your credit union. This will not give you the true market value of any one car, but will give you a general idea. Question the purchase of any car priced way below or above the range you find. In addition, you should check the “frequency of repair record” for any model you are planning to buy. To do this, consult the yearly April issue of “Consumer Reports” magazine. The yearly edition of The Car Book also contains useful information on safety and performance features of used cars. In both cases, this information is available by year and model.
The actual condition of the car will give you an idea of the value of the car, and knowing the history will help determine the true condition of the car. Shop around and look at a few cars of the same model before buying.
When you shop for a used car, do so in the daylight. That way any dents, rust, or cover-ups will be easier to see. Do not shop in the rain. Rain tends to cover up dings and dents and makes everything look shiny and new. Once you have visually inspected the car, take it for a test drive. As you start the engine all the warning lights should come on. These lights will turn off as soon as the engine starts. Any lights that do not come on may be disconnected.
Drive the car over several different kinds of terrain. Does the engine run smoothly—no knocking or unusual noises? Is the steering too loose or too tight? Does the steering wheel vibrate? Do the brakes grab or lock, causing the car to veer to one side? Are the brakes too soft—must push them all the way to the floor to stop? Make a note of anything that appears wrong or that you question.
If the car passes your inspection, ask if you can have your mechanic look it over. In this way, you will have a chance to find out about the mechanical condition of the car before you buy it. Ask the mechanic to check for any major problems the car should have. Discuss with the mechanic anything you had questions about from your initial inspection. If your mechanic finds no major problems with the car and feels it would provide you with good service, ask him/her to make a list of any repair work s/he recommends. You can use this information as bargaining power to get lower price from the seller.
Where to Buy There are several places where you can buy a used car. These include:
- New car Dealers--Most new car dealers also sell used cars. Usually new car dealers keep the best cars for their own lots and will offer some type of written warranty for the car. They also may have a service department and may have serviced the car before putting it on the lot. However, new car dealers also may have the highest prices and be unwilling to take a trade-in on another car. Their warranty may also be on a 50% - 50% basis with you paying one-half of repairs and the dealer paying the other half. Additionally, they may require that all repair work be done in their service department where rates may be higher than at an independent repair shop.
- Used Car Dealers – used car dealers tend to sell cars at lower prices than new car dealers, but the quality of the cars may not be as high as other sources. Used car dealers rarely give written warranties or have a service department. However, you will often be dealing directly with the owner of the dealership and may have a better chance of getting a repair made than if you deal with a salesperson. Also, most used car dealer’s honor an unwritten warranty on safety; so if you have a problem, take it back to the dealership. Find out the reputation of the dealer before you buy.
- Private Parties – Private owners may offer the best prices for used cars. Because private parties are not in the business of selling cars, there probably will not be a written warranty. However, if it is a fairly new car, it still may have a manufacturers’ warranty that could be transferred to you. Read the warranty to be sure this is possible.
- Car rental Companies – Many car rental companies buy new cars every year and sell their one-year-old cars. Some large companies do the same thing with fleets of cars. Cars bought from a rental agency or from a company’s fleet usually will have accumulated lots of mileage in a short time; however, in most large operations the vehicles receive scheduled maintenance. Car rental companies usually provide written warranties.
- Repossessed Cars - - Banks and other lending institutions sell repossessed cars. They often sell these cars for the amount of money still owed on them. But, if the previous owner was not responsible about financial obligations, he or she may also have been irresponsible about the maintenance of the car; or the car may had serious repair problems during the prior ownership.
Regardless of where you buy the car, ask questions. Is the seller the original owner? Has the car been in an accident? Why is the car being sold? Does the odometer agree with the wear and tear the car shows? Is the gas, brake or clutch pedal worn? The answers to these questions may help you later if you have problems with the car.
Also, read the classified ads carefully and analyze what is sated in the ad. For example, if an ad states “20,000 miles. It could mean that the odometer has been tampered with or there are structural problems with the car. The following table lists some of the commonly used abbreviations found in newspaper car ads.
Car Ad AbbreviationsA/C air conditioner
cond. or cd condition
conv. convertible
dr. door
elec. wind. electric windows
hdtp. hard top
hp. horse power
lo mi low mileage
obo or best offer
p.s. power steering
pri. Pty. Or pp private party
R/H radio and heater
WSW white sidewalls
xlnt excellent
Buyer Beware As a used car buyer, you rarely have the legal or warranty protection available to a new car buyer; so you should be familiar with the protection that is available. Many used cars are sold “as is”, without a written warranty. This means that if you have problems with the car after you buy it, you must pay for any needed repairs yourself. The seller has no further responsibility for the car once the sale is completed and you drive away with it. This is true of cars purchased from private individuals (through newspaper ads) and used car dealers as well.
A Federal Trade Commission rule (referred to as the “Used Car Sticker Rule”) requires all used car dealers (this includes new and used car dealers and rental companies) to place a large sticker, called a “Buyer’s Guide”, in the window of each used car they offer for sale. The Buyer’s Guide informs a buyer whether the car comes with a written warranty or is being sold “as is”.
The Buyer’s Guide also lists 14 major automotive systems and some of the more serious problems that may occur with the systems. This information should help you to identify the automotive systems that need to be checked before you buy. But do not rely solely on the information on the sticker. Always have a trusted mechanic or auto diagnostic center examine the car before you buy.
The Buyer’s Guide also tells you:
- That the dealer assumes no responsibility for repairs and that you will pay all costs for any needed repairs if there is no warranty;
- That the dealer assumes no responsibility for anything that is said about the car. Since spoken promises are difficult to enforce, the dealer should be asked to put any promises in writing.
