I think most people agree that buying a car is not the most fun experience. Yes, you will get a different or new vehicle, which can be exciting. The downside is the process of buying a car.
Last November, I had the “pleasure” of going through this process. Honestly, I went with my decision made. I was going to buy the car I was renting and continue on my merry way. After three days and many calls to my sounding board (my parents and colleagues), I bought a new car and sold my rental car.
What you need, want and can afford
Whether you buy a new or used car or lease a car, the decision often comes down to the type of car you need, the features you want and what you can afford.
The type of car you need varies from person to person, of course. Will you be moving heavy equipment or need it for the ski season in the Rockies? In my roommate’s case, they needed a bigger car to transport their dog. Understanding what you need for your situation is the first question to ask yourself.
Next, what features do you want? I wanted safety features like lane control and blind spot monitoring. Some people may appreciate a sunroof or nice speakers. Decide if the feature is a need or a want, as features tend to drive up the price.
Finally, it is important to know what you can afford. This is perhaps the most difficult thing to determine. For many people, financing is how they enable the purchase. A rule of thumb is to keep your car payment at 10%-15% of your monthly income.
Once you’ve answered these three questions, you’re better prepared to begin the car identification process.
Buy a new car
First, get pre-qualified for a loan before you go to the dealership. Many lenders offer free quotes that shouldn’t affect your credit score. This helps compare the dealer’s rate to the loan you’ve been prequalified for.
Second, a down payment, if you can afford it, will help lower your monthly payments. Generally, for every $1,000 you deposit, your monthly payment should be reduced by $20 to $30 depending on the term of the loan. The dealership will likely offer you a warranty on the car. Be sure to ask what the warranty covers, as it can be very specific. This is where the dealer makes a lot of money.
Third, do not purchase GAP insurance, which is optional insurance coverage offered by the dealership. This helps pay off your car loan if your car is destroyed or stolen and you owe more than the car is worth. Talk to your insurance agent instead, as they may have less expensive options.
In this environment, it can be difficult to trade due to lack of inventory, but it never hurts to try.
Buy a used car
Buying a used car is a different ball game. Before buying the car, you should have it inspected by a reputable mechanic to make sure there are no hidden issues. Also ask for the VIN and run a free CARFAX report to find out the car’s history.
Again, don’t be afraid to negotiate.
Rent a car
When renting a car, it is important to calculate the underlying interest rate that you will be charged. Then compare that to the interest rate that would be charged if you bought the car rather than leasing it.
Also consider how many miles you drive each month/year, as there are limits to how many miles you can put on the odometer during the lease term. The lower the annual mileage, the lower your payment will be.
Finally, having a higher residual value (price of the car at the end of the lease) is advantageous because it will keep your monthly payment lower.
Sell your leased car
When I sold my leased car, I didn’t want to spend a lot of time researching my options. However, a friend convinced me to do it anyway. This turned out to be good advice.
The dealer will make you an offer, which is a good place to start. Another option is to check CarMax. They offer free quotes online and a 30 minute inspection to confirm the offer.
You can also consider selling it yourself. This option may not be for everyone. Comparing offers can take time, but it could get you the best deal.
No matter what decision you make, I recommend that you enter the process prepared. Spending time up front could save you money in the long run.
Matthew Charles is a CERTIFIED FINANCIAL PLANNER professional and active member of the Financial Planning Association of Greater Kansas City. He is a Wealth Advisor for Mariner Wealth Advisors in Overland Park. The opinions expressed are for comment purposes only and do not take into account personal, financial, legal or tax considerations.