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Wednesday, March 29, 2017

Save Money When Buying a Car

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?

Comments

6 Responses to “Save Money When Buying a Car”
  1. Special Ed says:

    I just purchased a 2004 Lexus LS430 for <$20,000. Paid cash for the beautiful, one owner, $60,000(when brand new) car. Best deal I've ever made. And I love having NO payments. The older I get, the more I realize that payments are for suckers. But, I guess someone has to buy them new or I couldn't buy them used :)

  2. deegee says:

    COnsure Reports magazine publishes some great information about used and new cars in its car-buying guides. You can buy individual guides for specific makes and models which include the key dealer cost listings for all the optional features. I bought this prior to my buying my 2007 Toyota Corolla and it greatly helped me during the dealer negotiations.

    The car I owned before the Corolla was a 1991 Geo Prism (basically a Corolla) but it was used. It was one of those former rental cars (not by coincidence, I had rented a 1991 Prism while on vacation so I had a chance to try it out) GM bought back from the rental agencies and resold as high-quality used cars. GM backed these cars with the balance of the factory warranty, providing peace of mind to the buyer. What I also got was a huge price reduction (i.e. the first year’s depreciation, a considerable amount versus my lower amount of wealth in 1992) versus a 1992 Prism. Because I was the first customer to the dealer the day a few of these cars arrived, I saw one which had only 10k rental miles on it, a pretty low amount for a rental. The price was the same for all of these newly arrived cars, so I ended up buying it.

    The car lasted me 15 years.

    I was not able to find similar cars like this in 2007 so I bought a new car instead.

  3. Traciatim says:

    I found specs on cars, a huge pile of them. Then I plugged them in to a piece of software called Decision Oven. Decision Oven is essentially a decision matrix where you weight each specification or question about a list of items, and it spits out a ranked list of all the options.

    Then I ignored that and bought a minivan because it was only 2 years old and under 10 grand.

    The next vehicle I get will probably be a 1-2 year old low kilometer used car. Though maybe I’ll just lease a Chev Volt . . . that sure would be a huge change from a minivan.

  4. Robert says:

    Those are some cool stories! Deegee and Traciatim, thanks for the additional ideas. Here in Calgary, the public library has a subscription to Consumer Reports, so those reports should be free to library members.

  5. dilbert789 says:

    I’ve purchased a few cars and have went with a couple people to help them buy their own cars. Buying a car for many people is a hugely emotional decision and I firmly believe it SHOULD NOT be. Decisions about spending that kind of money should be at minimum slept on and shopped around. In my town there are 3 or 4 Ford dealers, it is the exact same car from dealer 1 or 2. Get them to fight for your business. The best negotiating tool to buying a car from anyone, is the ability to walk away and actually do it. There are thousands of cars out there, if you don’t like the sales guy or something seems off, walk away.

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