Buying a new—or new to you—car shouldn’t be something you dread! Far too many people hate the experience, though, because they know they’re sinking a lot of money into something that may—or may not—be reliable. New or used, buy or lease, sedan or sports car—we won’t even talk about mini-vans—and many other choices face buyers before they even take a test drive. That’s not even counting the nagging thought that you’re getting cheated on the deal.
But the process doesn’t have to be excruciating. All it takes is a bit of research, a lot of discipline and the ability to plan. That planning thing got you worried? Relax, we’ve talked with some experts, done some research and are ready to help you with a step-by-step guide to easing your angst over the purchase.
Why a new, new car might be an old way of thinking
New or used? “Drive me, love me, buy me.” That’s the call of a just-out-of-the-factory-and-off-the-truck automobile, the kind with that smell. But something else smells, too, and it’s the price on the sticker (assuming there even is a sticker).
For most buyers, particularly just-out-of-school millennials, the answer should be clear, according to Scott Tucker, president and founder of Scott Tucker Solutions Inc., a financial adviser business in Chicago. “The dumbest think anyone can do is buy a new car,” Tucker says. “New cars lose most of their value in the first year.”
Nedalee Thomas, author and founder of Princess Power, which advocates frugal living, among other steps, to empower women, agrees with that strategy. “One of the things I recommend in my Princess Power program is that all cars be bought ‘two years new,’ meaning buy a used car two years after it was manufactured,” Thomas says. “This way you get the best deal on a car that still usually has low miles and may even still be covered under the manufacturer’s warranty.”
And it isn’t just financial advisers who preach the strategy. Veteran car buyer Murray Suid, co-founder of MobileMovingMaking.com, is a true believer. “In 2010, we bought a 2007 Honda Accord from the local dealer. The price was about $10,000 less than a comparable brand new model. Here we are near the end of 2016, and we’ve had almost no problems. I figure the car will last another five years.”
There’s not just an immediate savings, he says. “In a way, that was a free $10,000,” Suid says. “By investing it in the market, perhaps it’ll be worth $30,000 by the time we need another car. Or it could have been a trip to Europe. Or …”
The case for new
All that said, one size never fits all. With rebates and other cost breaks, you can get a great deal on a new vehicle. This is particularly true during times when used cars are in demand – such as after a natural disaster—think the aftermath of Hurricane Katrina or Superstorm Sandy from a few years ago.
Not surprisingly, auto dealers back buying new. But there may be something to it.
Greg Warkenin, a sales manager for The Humberview Group, a consortium of more than 25 dealership groups, says you can find great opportunities for buying new. “The best times to shop for a car are when the new year’s model comes out, because you can sometimes get good deals on the previous year’s model, or leading up to the new year when manufacturers sometimes offer heavy discounts to end the year.”
Millennials, especially new college grads, can benefit specifically from discounts and incentives aimed at students and first-time car buyers, Warkenin says.
Jason Manning, marketing director for State Line Nissan in Kansas City, MO, also made a pitch for buying new because of discounts and incentives for recent college grads. “These discounts quite often allow people who were shopping pre-owned to find an even better overall deal on a new vehicle,” Manning says, closing with a piece of advice for millennials: “Regardless of make, be sure to call your local dealership and ask if they have any incentives you might qualify for—you may end up pleasantly surprised at what falls into your budget.”
Even some finance experts aren’t completely sold on buying used. David Bakke of MoneyCrashers.com points out a potential flaw. “Used cars will typically have more maintenance and repair bills involved compared to a new car, Bakke says. “So unless you’re handy with some of the minor repair stuff, a new car may be a better bet.”
One thing, however, that nearly everyone agrees on is the importance of setting a budget and knowing your credit score.
What can you afford, now and later?
The new vs. old debate is a great filter; an even better one could be how much of a car payment can you afford. Nahum Daniels, a Stamford, CT-based certified financial planner, explains the importance of this step. “First, it was the housing crisis, then student loans and now many Americans are facing another monster debt — car loans,” Daniels says. “Car buyers are in debt to the tune of $1 trillion dollars. Americans owe more in auto loans than ever before for two reasons: they’re buying more cars and cars are becoming more expensive.”
While car-loan debt affects many segments of the population, he says, it can be an even worse problem for younger borrowers. “This can be problematic for millennials already dealing with large student loans. Buyers need to do the math and keep several factors in mind before making a purchase. Make sure you calculate your payments and they fit into your budget.”
That means taking into account a number of other factors. Ali Ahmed, owner of seven traditional dealerships as well as an online venture called NowCar.com, points out some that might not be top of mind. “Before buying a car find out how much sales tax, tag, title and dealer fees will be in your county or state and have that money set aside,” Ahmed says. “Then, make an estimate or find out what your recurring monthly costs—gas, insurance, and monthly payments—will be.”
Once you have that information, Ahmed says, “You can then find out how much you can afford for a monthly finance or lease payment. However, since there are several payments that may come throughout the year, like yearly registration fee, regular maintenance like oil changes, parking costs and any parking or traffic tickets, it is best to have a budget where you can set aside at least $30 a month to pay for these extra expenses.”
Daniels, the financial planner, points out another benefit of having a monthly payment strategy. “After you’ve paid off your car, you can continue to put the money in savings so you can start saving for a down payment for your next car,” he says.
Now for the fun part – looking for your car
You know how much you can spend, and you’ve at least made some decisions about new vs. used. That takes up a lot of thinking. Now it’s time for some feeling – considering the various cars that you might want to spend.
In the old days, before the internet, that meant visiting car lots, elbowing sales people away as you try to decipher which cars are where. Some buyers still do that, but that’s probably not the path you want to follow. You can at least begin your car search online, through any number of car-buying sites, and find your top candidates for a purchase—if not complete the whole process that way.
We recommend that you do more than just find the car you want online, concentrating on four areas:
- Do you have a trade-in?
- Do you know the value of the car you want to buy?
- Do you have a down payment?
- Do you have a loan lined up?
Bakke, the financial expert, recommends using the Kelley Blue Book site, to get answers to the first two questions above. You’ll still have to have a visual inspection of your car to get real pricing, but you’ll at least know the ballpark number you should expect from your trade-in. You can also make sure the car you want doesn’t have an inflated price.
As for the down payment, that’s up to you. It can shave dollars off the monthly payment and can help with your interest rate. But the biggest factor on your interest rate will be your credit score. Again, you can find your score online, knowing that some standard factors go into it. Check out the infographic to see what makes up your FICO credit score:
As for your loan, and your payments, understand the relationship between your payment amounts and the repayment period.
Daniels, the financial planner, explains it simply. “Dealers are attracting buyers by stretching out the length of the loan,” he says. “Lower payments on longer loans mean that the buyer can often go up a level in size or luxury, but buyers need to be aware that they’re also going to be paying more in interest and finance charges when all is said and done.
“For example,” Daniels continues, “the average price of a new car in 2015 was just below $33,500. Figuring the average interest rate (4.6%) and down payment ($5,000), the buyer would have paid $3,412 in interest at the end of a five-year loan. An eight-year loan would have lowered the monthly payment by nearly $200, but you’d have to pay more than $2,100 extra in interest.”
This is why it makes sense to not only pick out the car but line up financing before you ever go to the car lot rather than depend on the dealer to find the financing. You can approach your bank or credit union or another source—some auto insurers handle financing, for example—and have the agreement in hand when you visit the lot. You’re under no commitment; if the dealer offers a better deal, you can go for it.
The test drive
OK, you know the car you want, you know the lot it’s on, you’ve got financing in hand, but there’s one more thing before you’re ready to start signing all the papers. You need to take a test drive (which includes more than the drive).
Richard Reina, product training director at CARiD.com and an auto expert/enthusiast with more than 30 years’ experience, has a checklist he follows:
- Conduct an external walk-around, examining the condition of the paint, the sheet metal (look for rust, dings and scrapes), the glass, the trim and the tires—it’s a good idea to ask when they were last replaced.
- Look under the hood to see there are signs of recent maintenance. He suggests checking the oil, brake fluid and belts and hoses.
- Study the interior to make sure the seat upholstery, carpet and mats are clean and damage-free. Take time to notice whether the sun visors and instrument panels are in good shape.
- Start the car and leave it park while you check all exterior lights, including the high beams, turn signals and brake lights. Make sure the mirrors, locks and windows work.
- Drive the car and make sure it accelerates and brakes properly. Make sure no warning lights are on.
Get the vehicle history as well and study it before you commit to the purchase.
Time to negotiate
You’ve driven the car, studied its history and have financing in hand. But it’s still not time to make a deal. Chances are, you’ve seen a price on the car. But have you seen the price? Up to this point, all the cards have been yours. That is to say, you should not let on too much about how much you know about the vehicle’s price, the value of your trade-in, the payment you’re willing to make or your financing.
That’s because you want to see what the dealership will offer. It may offer less on the trade-in or better loan terms than you’ve managed to find. You should hear the dealer out, but that doesn’t mean you should play the game where the salesperson runs back and forth to discuss negotiations with his or her “manager.” That manager actually is just another salesperson, anyway—but one with the authority to actually make counter offers. The good news: That manager could have quotas to meet each month, and knowing that could you an advantage, according to Mike Rabkin, owner of From Car to Finish, a national car negotiating service. “The end of the month is a good time to negotiate, as they may get a bonus for hitting their quota, and you’re the customer that puts them over the top, getting you a better deal,” Rabkin says.
At any rate, at least some of the back and forth between the initial salesperson and the manager is designed to wear you down while you’re sitting at the dealership. Bottom line: Cut out the middle person and ask to speak directly with the manager. Because at this point, you still hold the trump card. Which we’ll discuss next.
Should you stay or should you go?
If you stay (with a bad deal) it could be trouble. The experts all insist that you be willing to walk away from a deal at any point that you don’t like what you’re hearing. Easy for them to say, right? But Gene Caballero calls on his experience in the finance department of a Miami dealership to validate the strategy. “If you have the willpower to walk away from the deal, they 99% of the time will call you back in to renegotiate the price of the vehicle,” says Caballero, now co-founder of GreenPal, described as Uber for lawn care. “They do not want you to leave and when you do, you have all the leverage.”
If you have the willpower to walk away from the deal, they 99% of the time will call you back in to renegotiate the price of the vehicle.
And don’t worry that you’re being a bad person, another car-buying veteran says. “So what if you’ve been talking for two hours,” says Janet M. Nast, author, IT trainer and tech writer. “Your time is just as valuable as theirs and ultimately, it’s your wallet, not theirs. You owe them nothing— selling is their job—so don’t feel bad.”
Beware of the add-ons
Now you’ve struck the deal, you’re ready to sign the papers, everything’s great, right? Not just yet. You still have to make it past the finance “manager”—another sales person.
The big advice here: Beware the add-ons, such as dealer prep charges (which you may not be able to do anything about), extended warranties, service contracts, or gap insurance (which pays the difference between the amount you borrowed and the actual value of the car in case something catastrophic happens to the vehicle early in the time you own it). You have to decide whether you need these warranties and service contracts. Some experts recommend a warranty for a used car (particularly if the dealer warranty has expired or is about to).
Reasonable people can make reasonable arguments either way. The point is, these add-ons usually come up about the time you’re Jones-ing for the keys, and if you’re not careful, you’ll agree just to get the darn process over. Make sure you know what you’re buying.
That last point was echoed by Anthony Curren of Rick Curren Auto Sales and Service. “I had a girl spend over $2,000 at another dealership after buying a car from us, just because she didn’t know her warranty covered all the things that they fixed.”
Remember, buying a car isn’t an investment, it’s an expense, according to Tucker, the Chicago financial adviser. “Experian says that the average monthly new car payment in America today is $493 per month. That’s $5,916 per year,” Tucker says. “A $493/month car payment is going to result in you qualifying for $493/month less house! And a house can actually appreciate, unlike a new car.”
Still, buying a car ought to be exciting. Just remember to put in your research and to demand respect throughout the process. Your strongest weapon is your willingness to say no. But also remember that the goal is to say “yes”—with no regrets.