Posted by Robert on August 2, 2010
I recently met with two couples, both of whom are planning to buy a car. I realized that car buying is very individual, in that most people will approach it in their own way, with their own criteria. I can’t tell someone the “right way” to buy a car, because it needs to fit their lifestyle and self image. If that weren’t the case, there wouldn’t be so many brands and styles available. Even so, there are a few ideas that everyone can apply to their car purchase.
The first decision to make is which model of car to buy and the maximum amount you can afford to spend. These two choices are related, but they are based on your taste and preferences and your current financial situation. Once you’ve decided, choose whether to buy new or used. There are actually three choices and much of the decision comes down to peace of mind. Someone who can’t imagine buying a car that may have been mistreated will want to buy new. A person who is less particular about being first, but still wants the assurances of a warranty will be comfortable buying (certified) used from a dealership. Someone who prefers to save money and can accept that there may be surprises is most likely to buy a used car privately.
The next step is to get a very realistic idea of the value. If buying new, www.carcostcanada.com offers the dealer’s (wholesale) cost of new cars. It is acceptable to pay $500 over the dealer’s cost. This way, you begin the negotiating from a position of knowledge and you can be reasonably sure to get a fair deal. If buying use, www.vmrcanada.com quotes values of used vehicles depending on the condition and mileage. Again, this helps to determine at what price to start negotiations. (Note that I have no financial interest in either site, but have had good experiences with both in the past.)
Notice that financing has not yet been discussed. Apparently, dealerships will sometimes change the financing terms based on the sales price, in order to maximize their profit (and watch for fees added on). Negotiate price first, and discuss financing only after reaching an agreement on price. Financing is sometimes a valuable offer and should be compared to two alternatives: what is the cost of other debt and what else could I be doing with my money? If I were to buy a $12,000 car, I could pay cash. The alternative is that I could invest that cash in something secure like bonds. If long bonds pay less than 4%, I would prefer to pay cash unless the finance rate were less than the investment return. I could finance it with a line of credit, probably at prime + 2% (currently 4.75%) at the bank. But if the dealership will finance it at 2.9%, it would reduce the total cost of the car to me. As long as the finance rate is lower than the bank’s lending rate and higher than a secure investment return, it makes sense to accept financing from the dealer.
Because most people don’t buy cars very frequently, it’s not something we get good at. If you know someone who is very knowledgeable about cars and understands how to determine a fair value, find out if they would be willing to help you. I don’t have anyone to rely on, but I have successfully bought two cars. The first was a 2003 Toyota Echo. We were expecting our first child, didn’t need much room and appreciated the dependability and fuel economy. In other words, it was cheap to own. It had been written off and rebuilt, but we got a good deal and felt that allowed us to spend extra on repairs if necessary. We had no problems and sold it four years later to buy a minivan. When we were expecting our third child, we decided to buy a Honda Odyssey. We found a 2003 with under 100,000 kms for under $10,000 (important criteria for my wife and me, respectively) for sale privately. There was some cosmetic damage (lots of dents and scrapes), but I preferred to save money and not worry about the appearance. Because we bought privately, we used our line of credit to finance the purchases.
Are you a one or two car household? Do you buy new or used? How do make your car buying decisions?