3 RULES TO GETTING THE BEST DEAL WHEN CAR SHOPPING
Here are my iron-clad, no-exceptions rules to getting a good deal on a used car. Much more can be said on the subject but if you’ll follow these three simple principles, more of your hard-earned cash will stay where it belongs; in your wallet.
Buy New or Buy Used?
- Buy Used
New cars are cool. They smell nice. But they’re a terrible waste of money. The moment you drive a new car off the lot, that new car loses 5% of its value. If your investments did that, you’d accuse your broker of being a cheat. Buy a used car and let someone else take the depreciation loss.If you are concerned about hidden problems with a used car, I suggest test driving it over to your trusted mechanic (let the dealer know first) and paying $40-50 for a complete inspection. It’s like a home inspection; he’ll be able to tell you what, if anything, is wrong with the car. Take the inspection report back to the dealer and make him fix it or give you a better price. One time I did this it saved me and extra three hundred bucks on the final negotiated price. Buying used is the best way to get the most car for your cash. - Pay Cash (or check)
Imagine this scenario; average guy walks into a car dealership and picks out the shiny new car that he’s been drooling over for days, agrees to pay 20k for it, and then signs a loan agreement at 7.5% interest. Guy takes the keys to his shiny new car and drives off the lot as happy as can be. But the moment he hits the street, his new ride drops in value a thousand dollars! Over the next three years, that guy pays $22,397 on his loan and interest. By the time his shiny old ride is paid off it’s only worth $13,046. Meaning, in three years he’s lost $9,350.Paying cash is hard to do. Americans on average have a negative savings rate. Meaning we have more debt (not including mortgages) than we have in savings and investments. That’s tragic. So here’s what you do; save more and only buy what you can afford. Shocking suggestion, I know.Buy any car you want, as long as you can pay for it immediately. I paid $500 for a car before. The next one I bought cost $2000. After that I paid $9,000 for a car valued at $11,500. That means when I drove off the lot, I was actually ahead $2,500, not in debt like the average guy. Cash is king.
- Buy Japanese
We live in a global economy. As consumers in a global economy, we expect the best deal for our money regardless of its original source. And for my money, Japanese cars have been the best. Get this; I’ve driven two Hondas over the 250,000 odometer mark and sold them both when I was done! Those cars still had value, even after a quarter million miles driven.Although I’m suggesting you buy foreign (I’ve owned 5 foreign-made cars), every single one was purchased from an American salesman and Americans have performed all of the repairs. Since every one of my cars has been purchased used, none of my cash has gone to foreign auto makers.So whether you take my suggestion to buy Japanese or not, you should carefully at two things: the car’s resale value and its dependability. The 2009 models with the highest resale value, 6 of the top 10 were Japanese. No surprise there. How about dependability? J.D. Power and Associates 2008 Vehicle Dependability Study puts Japanese cars at the top of 7 of 11 categories. These two stats simply confirm what I’ve experienced myself; Japanese auto makers give me the best car for my money.
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1. Buy used… this isn’t the best way to look at it. If I buy a 09 Honda for 20K and keep in ten years. My cost is 2K per year.
If I instead by a 05 Honda and pay 15k and keep it 6 years, my cost is 2500 per year. Who is the sucker now?
Its more a problem of people flipping to a new car every three years or so, then keeping it for a longer time. For example 5 cars, in how many years?, do the math on cost of ownership. Probably could have bought a new car and kept it for 250K miles, for less then the 5.
2. Pay cash… sure you save the interest rate cost, and you are forced to see the true cost of a car. BUT, to think you are ahead after you pay cash is stupid. A car depreciates, you will lose money every time, paying cash doesn’t help here. However spreading out the cost of a car, makes a lot of sense since they have a useful life over the same period.
3.buy Japanese… it’s an opinion I don’t agree with, but none the less no comment.
Joe, thanks for the comments.
1. I understand your thoughts here. I am an advocate for buying cars and keeping them for their entire usable lifetime. But of course if you compare a used car kept for 3 years vs. a new car kept for 10 years you can make the new car seem like a better deal. One might suggest a $5,000 car kept for only six months has a $10,000 annual cost of ownership, but that would be ridiculous.
Cars depreciate 15-20% each year with their greatest rate of loss of value occurring during their first year. Buying a used car that has already depreciated buffers you from that loss. Here’s a great article on depreciation: http://www.bankrate.com/brm/news/auto/20011226a.asp. Letting someone else absorb that loss makes better financial sense.
2. Again, I can see where you are coming from with this suggestion, but it still doesn’t work for me. Are you really suggesting that financing a new car will save you more money than paying cash? Let’s test it.
Imagine that you and I visit a dealer together. You go for a new ‘09 (Honda, of course) and finance $20,000 at 7.5% interest. I opt for the same car, but a used ’08. It’s a program car with 10,000 miles and I pay $18,000 cash for it.
Your loan is for three years. We both keep our cars for three years. The average amount of depreciation for your new car the first year is $4,600 according to online depreciation calculators. That’s because new cars lose on average 15-20% of their value the first year. During the three years, your ’09 Honda will lose $8,873.50. Mine’s already a year old when I buy it, so my first year of ownership it will depreciate only $2,700. I lose a total of $6,945.75 for the three years I own it.
Stay with me.
At the end of the three year period, we both decide to sell. After three years, your ’09 is worth $11,126.5 to you. At 7.5% interest on the loan, you’ve paid a total of $22,396.32.
I’ve still only paid $18,000. Am I any better off?
After three years of depreciation, my ’08 with 10,000 more miles is worth $11,054.25 to me, according to an online depreciation calculator. You paid an extra $4,396.32 for your new car, but at the end of the same three years, yours is only worth $72.25 more than mine! Paying cash for used cars is simply the better way to go, financially.
I realize that not everyone can afford to pay $18,000 cash for a used car. So here’s my solution; save more and buy only what you can afford. If you’ve only got $500, that’ll get you something. I’ve paid that much for a car and I’ve also sold cars for that before. $5,000 will get you a decent amount of car is you shop wisely.
3. Finally, I don’t expect everyone to agree with my last point. But I strongly suggest making quality and reliability the main considerations in choosing a car. And don’t let the car salesman or TV ads be your source of information on what’s a quality product. A little bit of research will save lots of money and headaches down the road.
C’mon man, the new car smells better!
I agree with you 100% on cash vs finance. But sometimes, the new car has other things going for it besides the nice smell and shiny paint (if you got the cash).
The new car doesn’t have the chance that someone:
1. Never changed the oil, drove it like a maniac, and wrecked it.
2. Often took their 4 dogs to the park in the backseat
3. Smoked in the car
OK, those last two do have something do to with the smell!
Also, the new car may benefit from more saftey equipment.
You just have to be willing to pay the depreciation, property taxes, and opportunity costs…Man, that is one nice smell!
There are some nice benefits to new cars, I’ll give you that. If you’ve got the cash and want something factory-fresh and don’t mind making that dealer a little richer, then by all means! But I’m assuming most people are not going to be able to write a check for their next new car, which leaves them in a position of having to finance a rapidly depreciating asset.
A few suggestions for avoiding those used car pitfalls:
1) test drive that ride over to your trusted mechanic and pay him to inspect it for you (I’m a big believer in this)
2) get the CarFax (which won’t tell you if they smoked but should tell you if was wrecked), or
3) pay cash for a certified used car at a dealership. You’ll pay that guy’s markup, but should be able to get something close to new that’s been spiffed up with that spray-on new car smell!
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