Episode #7 | Buying a Car in a Down Economy
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Buying a car is hard enough in a good economy, but when people are clinging to every dollar making good decisions becomes all the more important.
This week we’ll cover how to get the best deal, negotiation tips and tricks, financing issues, and more.
Show Notes
This is such an important topic, because for most people buying a car is the second most important purchase decision they will ever make behind only a house. And the financial commitment that accompanies a car purchase normally lasts for years.
Before we get started, there are two huge mistakes that people normally make when buying a new car. And they probably aren’t what you’d thing:
- People tend to get carried away and over-spend on a lot more car than they need, and end up regretting the payments, gas and repair costs down the road.
- People also under-spend by not anticipating their future needs and wants, and then end up having to trade in and re-purchase too soon.
Both of these are costly mistakes, but both can also be avoided with careful planning and a little research.
Research
Three great sites when preparing for a car purchase are:
- Edmunds.com – lots of research info, but their crown jewel is their True Market Value pricing guide. It makes fools out of NADA and Kelly Blue Book, whom I believe to be puppets for the auto industry.
- Texan’s Credit Union Car Shop – their online research center will show you reviews, safety, warranty, recall data and JDPower & Co reports.
- Consumer Reports – one of the most trusted independent review organizations, who famously doesn’t accept advertising and is funded solely on subscriptions.
Pricing and Markup
What’s the typical dealership markup?
-@tomgost
Lately, the rules of the car buying game have changed so much that a discussion about pricing is really complex. In the old days dealerships would make money off all of the following:
- The difference between “sticker price” and “dealer cost”.
- Bonuses from the manufacturers on certain vehicle models.
- Bonuses based on volume of vehicles sold at a dealership.
- 50-75% of the cost of extended warranties.
- Kickbacks from lenders on financing that goes through the dealership.
But today, the volume of vehicle sales are so low that you should probably be more concerned about whether the brand you are buying is actually going to make it or not! Which is not to say that you should over-pay… But with the competition out there, it’s harder to overpay today than it was a few years ago.
So, when it comes to pricing, there are two surefire ways to get a great deal:
- Always be prepared to walk away! Never, ever get emotionally attached to a vehicle! That’s just silly. You could literally wreck it within 3 months like I did. So don’t let them hook you emotionally. In fact, always walk away to “think about it” after the dealership makes their “best and final offer”, and don’t call them till the next day.
- Always be prepared with comparables! Use Edmunds.com to get the TMV of the vehicles you are interested in, and also check eBay for the price of closed auctions on the cars you are interested in to see what people just paid. Print those things out, and don’t pay more than you know you could get a similar car for on eBay – unless you are getting the ORIGINAL manufacturers extended warranty, and then only pay a maybe $1-2,000 more.
Total Cost of Ownership
Is there a way to compare the yearly cost of multiple cars (maintenance, gas, monthly payments, etc.)?
-prometheus1981
This is a great question and what you’re really looking for is Total Cost of Ownership. Not just how much the car costs today, but how does it compare to others in the long run. There are a few major factors to consider:
- Purchase price
- Operating cost (fuel, oil, tires, etc)
- Repairs
- Residual value at resale
Luckily, there are more TCO calculators online than you can shake a stick at!
- Edmunds
- The Auto Channel
- Consumer Reports (Subscription Only)
- Internet Autoguide
Used Car Comparison
When buying a used car, do key auto parts fail as a function of miles/use, or time? Which is better, newer car or fewer miles?
-@sjuhawk
Fantastic question! Age does play a role in the decline of a vehicle’s lifespan, however it usually doesn’t kick in for many years. So, if we’re comparing only slightly used vehicles (2-3 years) then mileage makes all the difference!
Once you throw some real age into the mix, things become a little trickier. Depending on the vehicle and it’s care, after 5-10 years certain parts begin to wear out such as gaskets, rubber bushings, etc. and the degradation of these parts can cause costly repairs and breakdowns.
So, your grandmother’s 15 year old car with only 10,000 miles on it might not be so great after all because it could be disintegrating in the driveway.
But again, generally speaking go for fewer miles over younger car every time.
Financing and Warranties
When someone buys a car and takes out a loan (instead of paying cash), does the dealership get any sort of kickback, etc? Same question about roping a new car buyer into a extended service contract/policy.
-@meb5
The answer to both questions is, YES! Dealerships make a good deal of profit through arrangements with finance companies and extended warranty companies. And in fact, many people make the mistake of thinking that when they’ve finished making their price deal on the vehicle, they are done negotiating. NOT SO!!!
When you’re at a dealership the first two questions they will ask you are:
- Do you have a trade in?
- Do you need financing?
That’s because they want to know right off the bat where all they are going to get profit from you. In fact, I normally tell them that I may finance with them, but I’m undecided – even though I know I’m paying cash! That’s because they might give me a little better deal on the price if they think they have a chance at finance profit in the next room.
Anyway, the dealership is getting a healthy kickback on the finance costs, perhaps even 1-2% (or more) of the loan. (Will one of our car dealer listeners clue us in here???) So, make sure that before you even go to the dealership you get pre-approved from your bank – or even better a credit union. CU’s are non-profit and virtually always have better terms and lower rates. And don’t finance through the dealership if they can’t match or beat your pre-approval.
As far as extended warranties are concerned, the dealership is making 50% – 75% profit on them. Yes, it’s obscene. Never pay more than half price if you want the protection of an extended warranty. And in my opinion, never buy one that isn’t directly from the manufacturer. NO THIRD PARTY WARRANTIES!!!
Used Car Warranties
I will be turning in my current lease and most likely replacing it later in the year with a used car. Previously when I have purchased used cars I have not bothered with a warranty program; however, in this case I am looking at higher end vehicles like BMW, Porsche and Audi.
Those vehicles tend to be much more expensive to repair and we all know the more miles you put on a car the more likely for something to fail. So, is it worth pursuing a 3rd party warranty program and if so what are the gotchas to look out for? Any suggestions for reliable companies?
-@mrush_dfw
I’m a huge fan of the used luxury car, and have owned at least 7 or 8 this way. In my opinion there are only two ways to go here:
- Find a company like Straightline Automotive that specializes in only premium luxury used cars at good prices, then take the risk that you’re getting a good one. But don’t pay for a third party warranty.
- Buy a certified pre-owned vehicle from the same brand dealership and get the official company warranty. You’ll pay a huge premium for this, but it’s worth the insurance on ultra-expensive or exotics like my old AMG Mercedes where an engine replacement could run you $20,000+.
Out of State Purchases
What kind of fees come with a car that is given to you from another state?
- Anonymous
Whether your car is given to you or purchased from another state there are really only two things to remember:
- Don’t pay sales tax or registration fees in that state!
- Do pay them in your own.
When buying out of state you need to tell the seller you are taking it home and don’t pay them. This is going to shift the burden on you of taking your bill of sale to your local DMV office and paying sales tax and getting your license plates and registration.
If the car is a gift, no matter if it is from another state or your own, you are going to have to pay taxes on the reasonable value of the vehicle. So, do your online research and be prepared to pay the tax when you go in to register it.
Other Articles
Great stuff about the dealer and warranty/add-on markups and just overall good material about buying a vehicle. (Did you guys mention the cash for clunkers program?)
My wife and are planning on buying a house before November 30th, when the $8k government assistance expires. How about doing a similar show on buying a house?
Gregory
Wow, great article!
My wife and I bought a used car from a dealership here in Dallas TX. The experience there was ok before the purchase and absolutely terrible after buying it. They were going to fix a few things but ended up fixing not even half of them. The experience overall was so lame that it made me want to never buy another car… ever. Oh and by the way, even though the car we bought is from a great Asian company, the dealership focuses on American cars. And let’s just say that the company was going through a bankruptcy at the time that we bought the car.
Hey, gang — been meaning to comment on this episode for awhile. It came out right in the middle of my own car search, and it was helpful advice.
Most of what you said I was already doing (so it was nice to get confirmation that I was going down the “right track”) but you also mentioned some things that swayed my decision. For example, I had been leaning towards a lease — instead, I shifted direction towards buying a car with some miles on it, but with a similar payment that wasn’t being eaten up by lease fees. I love my new car (2008 Prius).
Some advice I might add:
– Figure out the exact car you want. Don’t just say, “I want a Prius.” Say, “I want a Prius between 2006-2009 with x number of miles and y package.” This helped me cut through the bull with dealers.
– If buying used, aim for getting single-owner vs. fleet cars. Because I zeroed in on this, I was able to get better maintenance history records. I also had the peace of mind that a non-fleet car wasn’t going to be run into the ground.
– Call tons of dealers and keep notes. While it was a pain in the ass, because I called all of the Toyota dealers in a 100 mile radius, I found the perfect car with the cheapest price just south of DFW. I was just looking at my local dealers with little luck.
Thanks again for this episode!
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