*Please welcome our guest writer, Jeff, an STS-affiliated Certified Financial Planner. Jeff has generously offered his time and expertise to the blog and I am happy to share his first post with you today! I’m in the market for a new car (baby on the way means we need ALL. THE. SPACE.), so I’m really excited about this one!
Let’s be real, the car buying experience is not fun. From the time you start researching possible options, to signing the final purchase documents, there is a copious amount of important decisions you must make. Thankfully, the internet has made the process of identifying your perfect new ride easier, but actually purchasing it remains a big challenge.
Earlier this year, I was driving a 2008 Honda Civic with 140,000 miles that I had owned for many years. The car was far from perfect, but it had been reliable through the years, fuel efficient, and allowed me to pay down my student loans instead of paying a monthly car payment. Unfortunately, that all came to an end when I got into an accident on my way to work. As is true with many older cars, the cost of repairs was more than the value of the car. Financially, the only option that made sense was to buy a new car.
Like many other major financial decisions in life, this was the first time that I had to go through this process on my own. Knowing the importance of this decision, I scanned the internet for a crash course on car buying. What did I find? A few ads, a couple more ads, and some consumer reports sites that were filled with…you guessed it, ads. Consequently, I realized that the traditional car buying process is one big sales cycle circus. From the moment that you are introduced to a car via some form of marketing, to the time you drive off the lot, car manufacturers’ only goal is to get you out the door with a new car as quick as they can.
I may have exaggerated a bit about only finding ads while trying to educate myself about buying a car. There is in fact good information out there. All of which I recommend that you spend time going through. That being said, my journey taught me a few important lessons that I didn’t read initially, but believe were major difference makers in my car buying experience. Here is a list of three things to keep in mind that next time you are buying a car:
1. Pre-finance From a Bank or Credit Union
When it comes to making important financial decisions, emotions are not your friend. Therefore, you must negotiate with yourself before negotiating with a salesperson. It is far more prudent to evaluate the terms, monthly payment, and cash-flow impact of a new loan from just about anywhere else other than a car dealership. It may also help you avoid a potentially risky situation. Car dealers are notorious for offering a very attractive monthly payment to potential buyers. However, they often neglect to tell you that your loan is attached to a lengthy payoff period, or requires a large down payment. Pre-financing allows you to avoid those pressure-filled situations, and gives you time to thoroughly evaluate your new loan. Moreover, obtaining pre-financing before stepping foot in a car dealership provides many other benefits such as:
- Buyers that enter car dealerships with pre-financing are perceived as “ready to buy” which means salespeople will go the extra mile for you.
- Many major dealerships offer in-house financing. If so, they may be willing to give you better terms on your loan if you finance through them.
- Pre-financing allows you to negotiate on the purchase price of the car, not the monthly payment.
- Financing from a bank or credit union that you already work with allows you to consolidate your financial affairs. That being said, you should always shop for the most favorable loan terms before considering convenience factors.
2. Target dealerships that have a service department.
The auto industry is extremely competitive. Car dealerships have seen the volume of new buyers drop over the years as cars last longer and longer. They also have had to cope with smaller profit margins due to online pressures and more competitors. In order to compensate, many dealerships now offer a service department to generate additional revenue. In fact, dealerships that do have a service department often generate most of their profits from providing ongoing maintenance. Afterall, you still need to get your oil changed, replace your brakes, and purchase new tires. When it comes time to negotiate, this gives the dealership a reason to discount the price. Thus, if you’ll use the service department, say so. Of course, it is also best to follow through with your promises. Doing so will provide even more incentive to that dealership to discount the price of your next car in the future because they will be able to confirm that you in fact do use their service department.
3. Buy a “slightly used” car.
But… Lemons! Here is the deal. In regards to buying a used car, there are always risks. That being said, you can greatly reduce the risk of buying a used car that turns out to be a “lemon” (a used car that turns out to have several manufacturing defects affecting its safety, value, or utility) by taking a few things into consideration. Most importantly, the reputation of a dealership is paramount. An established, well run dealership is far less likely to sell a defected car opposed to a random used car dealership on the corner. Next, a Carfax report will disclose several pieces of important information such as accident history and previous owners.
Make sure to request and review a Carfax report before you consider purchasing a used car. Finally, it is important to comprehensively consider the year, make, model, and mileage of the car. For instance, a 2017 model with 40,000 miles on it will almost always operate better than a 2012 model with the same millage. Furthermore, although admittingly I am biased, manufacturers like Honda that have a reputation for quality and dependability are often less likely to have defects that may be costly in the future. By purchasing a slightly used car, you can potentially sa
ve thousands of dollars that are lost the moment a new car is driven off the lot.
In the end, buying a car is a major financial decision, and it’s important to understand every aspect of the process. By educating yourself, you will go into negotiations prepared and confident that you are making the right decision. By following these steps, here is a brief summary of the Certified Preowned 2017 Honda Civic EX that I recently purchased.
|Purchase Price of Vehicle||N/A||$17,000|
|Total Price Paid and Financed*||N/A||$20,271.17|
|Number of Monthly Payments||Up to 72 (through dealership)||Up to 84 (credit union)|
|Interest Rate||3.68% (through dealership)||2.68% (credit union)|
*Includes cost of gap insurance, taxes, title and registration, and other miscellaneous services charges