Tips for Buying a Car

tips for buying a new car

It has been some time since we sent out a newsletter - after a physical move to our new office space in Wayne, and a transition to a new operating system it has certainly been an interesting month!  Here is a great article a fellow Advisor in our office, Pete McKenna, put together on what to think about when purchasing a car.  Happy Spring!

Clients sometimes ask us questions about the stock market and when it is a good time to buy or sell. Our general response is that the client has no control over the market and the effort to try and time the market is unlikely to produce any value. Few clients ask us for help with their auto purchases and that is something that is within their control and worth discussing as they may be able to produce value by putting some effort into their purchase and financing decisions.
 
In researching this article I read an interesting quote: “Car makers make cars, car dealers make deals”. This was a prelude to the discussion about not letting your emotions get involved in the process. If you let the dealer know that you love, love, love this vehicle, you have given the upper hand in the negotiation to them. One piece of advice I think makes sense is to break your car buying into three separate trips. One to look over the vehicle and see how it fits your needs. A second to take a test drive. A third to make the deal. By separating the process into three distinct visits, you are less likely to be swept up into a deal you later regret.
 
Historically the economics of a car purchase favored a cash purchase and keeping the car 10 years or more. Today’s vehicles are very different from their predecessors. Rapid technology and safety improvements make cars obsolete very quickly and it may no longer make sense to buy with a 10+ year horizon in mind. If you are likely to want or need to upgrade sooner than 10 years, base your decisions on that reality and evaluate the purchase, lease and financing decisions with that time frame in mind.
 
Proper Preparation
 
There are numerous free resources available on the internet to improve your car buying experience. Consumer Reports compiles safety, reliability and reviews of most vehicles and can provide side-by-side comparisons of all similar vehicles. Another great site is the Insurance Institute for Highway Safety (IIHS). They compile safety data for each car model by year. In July I was looking for a car and was comparing a deeply discounted 2016 model versus a less generous offer on the 2017 model. When I looked at the IIHS data I saw a negative crash test result for the 2016 that was addressed with some engineering changes for the 2017 model. In my mind the savings differential evaporated when I thought about the improved safety of the 2017 model. Twenty years ago the car dealers had all the information and all of the power in the negotiation of a deal. Today, the educated consumer comes armed with as much, if not more, information than the dealer and a level playing field means you are more likely to get a fair deal.
 
Don’t Just Drive Around the Block
 

Cars are a big expense. Next to housing, it is one of the greatest expenses most households have. Before plunking down your hard-earned cash for a vehicle that holds its value and lasts a long time, put it through its paces. See how it feels getting in and out, think about loading groceries in the trunk. If night time driving is not your favorite, try driving this car at night to see how the headlights and sight lines work for you.
 
Be Prepared to Buy for Cash
 
Few of us are ready, willing or able to walk in and plunk down $30,000 cash on a new car. Having said that, the only way to evaluate if the price you are being offered is fair is to know explicitly what the cost of the new car is. If you muddy up the water by discussing financing, leasing, trade-ins, etc. at the same time you will end up with a net, probably monthly, price that is hard to compare to other offers. Alternatively, if you get a clear indication of the price of buying the car you can compare that to other dealers or online offers to see if it is reasonable.
 
By evaluating how much you can afford to pay in cash and what your cost of borrowing would be from other sources, you can negotiate on the financing piece after you have an agreed price on the car. Evaluate your funding sources before going to a dealer. If you have a Home Equity Line of Credit, determine what it would cost to borrow the needed amount from that source, consider if they have an option to get a fixed rate for the time you are looking to borrow. While the interest on the Home Equity line is most likely tax-deductible, the other sources are not, so compare the options on an after-tax basis. In many cases the car companies may provide low cost financing options as these help them sell more cars.
 
If you plan to trade in a vehicle, do your research to determine its value and negotiate the trade in separately so that any savings on the purchase aren’t squandered on a low valuation on your trade-in. In my most recent car purchase I negotiated a sale to an auto wholesaler in advance so that I had a firm number in mind when the dealer made their trade-in offer.
 
Buying versus Leasing
 
Buying for cash, or buying with a loan, means at some point you own a car and no scheduled payments. When you lease a car, you are essentially renting the car for an extended period of time. Once the lease runs out, you are without a vehicle until you start making payments again. Leases aren’t all good or all bad. They can be an effective way to obtain a vehicle as long as you understand what you are getting into. In a lease you are typically required to pay for maintenance and non-warranty repairs, just like a purchase. The easiest way to compare a lease to a purchase is to add up all of the expenses of the lease (down payment, monthly payments, turn in fees, etc.) and compare that to what you would have spent to buy the car either outright or with a loan.
 
Timing Can Be Your Friend
 
If you need a car today, you may not be able to make the best deal possible, but if you are not in a hurry there are better times to buy than others. Dealers are eligible for incentives from the car manufacturers and these are often tied to monthly or annual goals or competitions between dealers. By shopping on the last day or two of a sales month you may find a dealer with enough to gain from incentives that they will sell a few extra cars at prices close to or even below the invoice cost. Similar to other commoditized products, there are also times when certain types of vehicles may be more or less in demand. When gas prices are high, pickup trucks and large SUVs may not be flying off the lots. Last year was somewhat typical of a low gas price year, sales of large cars and trucks were high, while small sedan sales were down from 2015 levels. This may help you if you are looking to buy something that is “out of favor” at the moment.
 
Conclusion
 
If you are willing to put some time and effort into the process you are going to be better informed and end up with a better feeling about the outcome than going in unprepared. If you would like assistance with the process of buying a car, feel free to reach out to the team at Upswing to help you get your arms around the process.