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Buying a Car? Read This Financial Advice First

A few years ago when my son was in college, I gave him my old car to drive. Now, four years later, my son has a job and an apartment and uses this same old car to commute. The car is still reliable, but does need a little maintenance, and my son is thinking about buying a new car. He’s asking my advice, so I thought I'd share my advice with everyone. Buying a car is one of the priciest purchases you can make, so it's definitely a subject that requires some financial advice.

Choosing the right car is very subjective. There are practical, emotional and aesthetical needs. Some people only care about a car as transportation. For some, a car needs to be comfortable. For others a car needs to project the buyer’s personality or be beautiful to look at. For still others, a car is the manifestation of sophisticated technology and needs to look and go fast. I think of a car as transportation, but I also want to be comfortable while I’m being transported. My son wants the car to fit his transportation needs and be fun to drive. When my wife bought her last car, her only need was a place to put her purse that wasn't on the passenger seat or too far away. So how do you choose? (For related reading, see: The Complete Guide to Buying a New Car: What to Look for in a New Car.)

Make a List

You won’t be happy if you get a car that looks great and goes fast, but can’t fit your family or transport your dog or bottoms out on your driveway. So make a list of the most important transportation criteria and use this as a guide during your search.


I happen to think Consumer Reports is one of the best sources out there for car information. They have a lot of technical information on the cars, and they test drive every one. They collect information from their readers on reliability issues and even have a buying service to help you get a good price. Since they accept no advertising, their advice is unbiased, but remember, their criteria are not necessarily your criteria.

Here’s a list of good places for car research:

What Can I Afford?

Financially, the best way to buy a car is to buy it new with cash and keep it for a long time, preferably 10 years or more. You can get the best price, you don’t pay any interest and you can sell it at any time. A car is a depreciating asset that doesn't depreciate in a straight line. New cars depreciate the most when you drive them off the lot. They depreciate rapidly in the first couple of years and then depreciation slows. Keeping your car a long time means the rapid depreciation when the car is newer won’t matter to you. (For related reading, see: Cars That Depreciate the Least.)

How much car you can afford is obvious if you're paying cash, but not if you take out a loan or lease your car. Then you have a monthly payment. Don’t get into any deal that lasts over five years (or 60 months). If you do, you are likely to be under water (where you actually owe more than the car is worth) for at least part of the deal. Sure your payments will be lower, but you are locked in for way too long. Make a realistic budget and include the car payments, insurance and maintenance. Try to keep your debt-to-income ratio less than 15%. You should also be continuing to save 10% or more of your income. If your car payments cause your savings to go away, you’re buying too much car.

If you find that you can’t buy the new car you want, look into a used car. For as little as $2,000 you can get a used car that will take you from point A to point B, and if you spend more you can actually get a nice car. Just remember that any used car will need some maintenance, so put that in the budget. If you buy a used car from a dealer, you might be able to get up to a six-month warranty, but you will definitely pay more than buying from a private party. Always get a Carfax report on any used car you buy. Most dealers will provide it for free, just ask. For a private party purchase you will probably need to buy it. The Carfax report will give you the car’s collision, repair and purchase history. (For related reading, see: Retirees and Cars: New or Used.)

Lease vs. Loan

When you buy a car with a loan, you are actually buying a car you will own when you make the last payment. When you lease a car, you are renting it. At the end of the lease, you can buy the car at a preset price. Which is better depends on how long you plan to keep the car. If you like a new car every two years and don’t mind not owning your car, then leasing can be a great way to go. You will always have the latest and greatest, but you will never be done with that payment.

On the other hand, if you keep your car for 10 years and take out a 48-month loan, you have four years of payments followed by six years with no payments. With both the lease and a loan, you are responsible for any repairs or maintenance not covered by warranty. With a lease, you're allotted a preset number of miles (often 12,000/yr) and if you drive more than that, you will be charged for them. (For related reading, see: New Wheels: Lease or Buy?)

Getting the Best Deal

You’ve decided on a car and how you’re going to pay for it. Now how do you get the best deal?

Separate price from all other factors – This tip works best when you are paying cash or are taking a loan. The car dealer will want to give you a price, based on how you’re paying and other factors like your trade-in. Ask for a cash price without a trade. You can always say you’ve changed your mind and now want a loan or have a trade-in later. This gets you a price for the car that you can compare with other places using TrueCar or some other service.

Arrange financing before going into the dealership – The dealer might have great financing deals, but sometimes those great deals mean you actually pay more for the car. Shop around for a loan before going and see if the dealer can beat it after you’ve negotiated the price of your car. Check your local banks and online to find the best rates. (For related reading, see: How to Get the Best Price on a New Car.)

Shop on the last day of the month – Dealers need to move a certain number of cars monthly to get incentives from manufacturers. Salespeople are measured monthly. So if you buy your car on the last weekend or better yet the last day of the month, you’re more likely to get a good deal. Better yet, try the last day of the quarter.

Make sure the dealer can get your car – If you find what you want on the lot, that’s the best way to make a good deal, but the chances of them having it in your color with the right features is pretty low. So dealers trade cars to get the car you want, but often ask for a deposit first. Always know where the car is and when it's arriving before putting down a deposit; if the salesman doesn’t have a good answer, walk away.

Put your deposit on a credit card – Deposits on new cars are refundable if the dealer can’t get the car you want, but it’s a pain to get your money back. Being able to threaten the dealership with a chargeback on your credit card is a good way to make them refund your deposit if they can’t get the car you want.

Extras – The dealer will try to sell you all kinds of extras. Unless your particular model is very prone to mechanical problems, I would avoid the extended warranty. Many extended warranties are actually very poor and don’t cover things that you think they should. Dealers like to sell them because they make lots of money on them. Other bad deals are undercarriage coatings or rustproofing, fabric protection and paint protection. VIN etching is generally a good thing, but keep in mind the dealer is going to charge a lot for this: $200-$300. You can buy a do-it-yourself kit for $30. On the other hand, it's pretty convenient to have the dealer do it for you. (For related reading, see: The Complete Guide to Buying a New Car: How to Negotiate Prices.)