The Finance Corner: Car Ideas You Auto Think About

Follow the sun to the American Dream.

Of all the purchases in your life, the purchase of a car is probably the most labor-intensive and time-consuming (after buying a house), if you want to get a deal for your money.  Not everyone chooses to buy a car.  Some people take the bus or the subway in big cities- if you are in a metropolitan area you might want to look into ZipCar as a way to reduce costs.  However, for the rest of us, buying a car is like navigating a minefield; if you aren’t careful you might end up stepping on a Ford Pinto.

The first question you must ask yourself is, “Do I want to buy New or Used?”  That itself is a difficult question: reliability of a new vehicle versus the money saved on a used vehicle.  The first year depreciation on a new car is about 15% to 20% of the purchase price, and each year thereafter it depreciates at approximately 10%.  I advocate buying a car used to save yourself the money, but this is a highly personal preference.  Below, I focus on what to do when buying new cars, and in the next installment of The Finance Corner I will cover buying used cars.  Whichever you decide, I hope I can help.

BUYING A NEW CAR

There is not nearly as much rigmarole when buying a new car.  Compared to buying a used car, the procedure is fairly straightforward, so I will just provide a few points to consider.

I think I have a coupon for this.

1) Decide on what features you want.  Sunroof? 6 CD Changer? Can she do point-five past light-speed?  Can she make the Kessel run in less than twelve parsecs?  Figure out exactly what you want in your car, then decide if you have to have it right now.  If you must have a sun roof, that is something you need to get at the time of buying your car since it is significantly more costly to have it installed later.  But if you want a CD changer or amazing stereo, that is something you can install later, and possibly at a much lower price.

2) Not all new cars are “new.”  There is a very small space in the car market between “new” and used.  Every dealership has several cars on hand to lend out to people bringing in their cars for repairs.  These have never been owned before and have been cared for by the dealer, but may have some decent mileage on them.  Dealers will sell these cars when the get a newer model year loaner car.  You won’t save as much getting these as you will getting a used car, but you can save a lot over buying new.  You should still have these loaners checked out by a diagnostic mechanic first.

Well my five aces beat your four aces, sorry.

3) Do you really need an extended warranty?  Warranties are gambling-literally.  You are gambling that there will be a problem with the car and the warranty company is gambling that there will not be a problem.  The reason that they keep selling warranties is because they usually win that bet.  If you can afford to buy another car or pay out of pocket for a major car repair then you should not purchase an extended warranty.  Just about every new car on the market comes with a manufacturer’s warranty as it is.  One thing to check when considering getting an extended warranty is: does it start running from the date you buy the warranty or from the date the manufacturer’s warranty ends?  If it starts running immediately you might as well say no thank you.

One “crazy out there” thing to consider is purchasing your car on your credit card.  No, don’t run off, hear me out.  If you plan to buy your car and pay for it outright with no financing, consider trying to buy your car on your credit card if you have the credit limit.  Most major credit cards extend the manufacturer’s warranty by an extra year when you purchase something on the card.  A free year warranty on your car would sure be nice.  Also, if you have a cash back card, 1% cash back on $20,000 is $200, not chump change.  The trouble with this method is that car dealers DO NOT want to sell you a car on a credit card because of the fees they are charged.  However, per their merchant agreement with the credit card companies, they are contractually obligated to do so.  That does not mean it will be easy, it may involve contacting your credit card company and having them apply legal pressure on the dealer to comply with their merchant agreement, and there is little chance you will get a discount off the sticker price if you are going this route.  But if you were going to pay sticker anyway, why not get $200 back and a 1 year warranty?

To Consider When Buying Any Car

There are a couple other points to keep in mind when deciding on a car that you may not have thought about, and a couple of negotiating tactics from one of our own professors to try out next time you’re haggling.

What exactly is the deductible on this?

1) Check how much your insurance will be on the car you are interested in.  Newer and/or fancier cars will have higher rates, while older cars will have lower rates.  Even keep in mind the color of the car, as that affects theft rates for cars, and in turn affects the insurance cost.  Want a red Ferrari?  You might as well just start shoveling hundred dollar bills into a fire.

2) Check your town’s Vehicle Excise Tax on your potential car.  This can be surprisingly high depending on where you live.

3) Research the cost and ease of repairing your potential car.  Some brands, like Fords, are relatively easy and inexpensive to repair, while others like an Audi will bleed you dry if you ever need a repair.

4) When negotiating on the price of a car, the default position to take is use an objective criteria for your pricing rationale, such as the Kelly Blue Book value.

5) Try some nonstandard negotiation techniques.  The following two techniques are little tidbits I learned from our very own professor of negotiation, Professor Joseph Ramrath.

If you know who this is and why this picture is here in this article then +10 points for you.

a) Don’t negotiate.  Walk in, ask to talk to the manager, and ask the manager for the lowest price that he will sell you the car you want for.  Tell him that you will ask the same of five other dealerships in the area.  You will not tell any other dealership what any of the other dealership has bid, and they may only make one bid, this is not a negotiation.  You will take the lowest bid made to you.  To give incentive to the first manager tell him you will take his bid if he even is within $200 of the lowest bid.  This worked for Professor Ramrath and he paid $5K lower than sticker for a brand new car.

b) Again, don’t negotiate.  Don’t bid for the car.  Tell the salesman that you don’t like the price on the car and that you know they know the price is unrealistic.  Have him go back to his manager and get a better price for you.  Don’t even give him a figure, just say that the current price is insulting.  When he comes back from his manager, before he gives you the offer tell him, “If I don’t like the offer you give me I am leaving and this conversation is over.  Now do you want me to hear your offer or would you like to reconsider it?”  Again, this worked for Professor Ramrath, without any need of giving the dealership a figure for what he was willing to pay.

Join me next time in The Finance Corner when I discuss, in even more depth, the ins and outs of buying a used car.

References:

Typical Car Depreciation