10 Tips for Buying New or Used Cars

10 Tips for Buying New or Used Cars

The average car payment in the U.S. is about $400 per month, and the average interest rate paid when financing the loan is about 10%. Based on a $30,000 car purchase, financed at 10%, the total cost will be about $38,200, if using a 5 year loan. Ouch! But that is not the end of the story. You had to earn the money, pay taxes, and pay for the car with after-tax dollars. When paying with after-tax money, you may have had to earn $48,000 to buy that $30,000 rapidly depreciating asset. But that is still not the end of the story. When you drive off the lot, your car could lose 20% (or more) of its’ value, making your new car worth $24,000! How many times in your life do you want to blow $48,000 on something that is worth 24,000?  This is where having an average financial IQ will lead you on the path to poverty, rather than financial independence.

This blog is to raise your financial IQ, and a post about how to save money when buying a car is far overdue. Here are some important tips:

1. PPPPP

The “5 P’s” are an acronym for Proper Preparation Prevents Poor Performance, and I would highly recommend you keep this in mind before making any financial decisions, and buying a car is a huge financial decision. Be prepared, and factor in the cost of ownership, depreciation, interest costs, and the actual after-tax cost of buying your vehicle before ever stepping foot in a dealership.

2. Get pre-qualified at your credit union

Just remember that any bank, just like many auto dealerships, earn more money if you pay a higher interest rate on your purchase, so go get prequalified first at the lowest possible interest rate. Many credit unions have the best rates and are financing new and used cars at 1-3%.

3. Compare cost of ownership

This is where spending some time on ConsumerReports.com could save you a fortune. I recently purchased a KIA Optima, as the cost of ownership, miles per gallon, overall appearance, luxury and performance received top ratings. Also factor in that fancy cars usually mean more expensive gas, and less miles per gallon, so the wrong car could cost you more of your hard-earned cash for many years to come.

4. Compare Costco pricing 

Before going to the dealership, you may want to go to Costco.com and see about which dealers in your area will give you Costco pricing. This gives you an upper edge when arriving at the dealer, which must honor the lowest price quoted from Costco. If you have your financing lined up, (step 2) and your price is the lowest, you are on the right track.

5. Don’t trade in your old car

If the car dealership cannot make the money on you with higher interest rates, or a higher price, they may try to buy your old car at the lowest possible price. Simply know what the private party value is and consider that selling it on your own may be the best option to fetch a fair price.

6. Know your rebates and discounts

Many car companies will pay you to switch to their models. When I applied at Costco.com, the dealership immediately sent me a listing of any of the possible discounts or rebates. This brought my already low price down even further.

7. Calculate your depreciation 

Many cars lose 20-25% of their value the second you drive them off the lot, so bring your smart phone and determine the value of your car if slightly used. You may decide to buy a used, low mileage car, financed with the super low rates from your credit union.

8. Calculate your after-tax cost

A $30,000 car can cost you far more than you think. Be sure to factor in that your purchase must be made with after-tax dollars, likely at 25-28%. After taxes, interest, and depreciation calculated into the equation, your true cost could be $48,000 to buy a car worth $24,000.

9. Higher payments may be better

Many Americans only look at the payment to determine how much they can afford to spend on a car. Car dealerships can use any number of factors to lower a payment, many of which are very bad for your financial future. Be vary careful to know the interest rate and the other factors mentioned above., and if you cannot afford the 36 month payoff, you may be buying more car than you can afford.

10. Pay cash in the future

You should set a goal to pay cash for cars in the future. I drove my last car for over 220 thousand miles, as delayed gratification is important to building a strong financial foundation. If you must borrow, finance it at 0%, if possible. If you pay interest, support your local not-for-profit credit union rather than a bank.

I consult with American families every week that have made the mistake of buying more car than they can afford. They financed at high interest rates after paying too much, and it can take 5-7 years to undue the damage. It is much easier to avoid the mistake in the first place than to try and clean up a financial mess. Please pass it on to anyone you know that is planning to buy a car. It could save them a fortune!

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