Frugal Fridays: Car Talk
Fri Nov 02, 2007 at 01:08:06 PM PDT
Welcome to Frugal Fridays where we share money saving tips, discuss living frugally and generally talk about personal finance issues. When I went into work yesterday, my officemate had a tale of woe of being in a car accident the day before. Bad news for her is that it appears her car may be totaled and now she has to go car shopping again. Suddenly, like a bolt from the blue, or like a Lincoln Town Car causing a four car collision, I had an inspiration for what today's topic should be. It just goes to show that there's a silver lining to every disaster. Of course the silver lining is mine and the disaster is hers, but let's not quibble over details. So follow me below the fold for some basic car buying advice and please use the comments to share your favorite car buying story or tip.
Disclaimer: I am not a financial professional. I'm just a consumer who tries to be educated. Take anything I say with a grain of salt.
Do You Really Need to Buy a Car?
Before you go out to purchase a car, try thinking outside the box and look at whether or not you really need a car after all. The expenses of owning a car include gas, maintenance, registration fees, parking fees and fines as well as the purchase cost. Wouldn't it be nice to avoid these costs if at all possible? Here's a tale of how a family of five did without a car for a year: Carless in Seattle.
If you live in an urban environment, you may be able to use public transportation for your daily commute. For the weekend trips to the grocery store or out of town, you may find that there are rental options that work well enough. Many traditional car rental agencies are starting to open rental offices in urban centers to try to appeal to residents who don't own cars but may need them occasionally. Car sharing services such as Zipcar and City Car Share (and Flexcar, which is now part of Zipcar) are available in some areas. These can be a very economical and convenient alternative to car ownership. If you are looking for a carpool partner or a longer road trip partner, check out eRideShare or Craigslist.
New or Used?
If you have decided that yes, in fact, you really do need to buy a car, the first question to ask yourself is whether you want to buy a new one or a used one. The truth of the matter is that the value of a new car depreciates very quickly. The moment you drive the average new car off the lot, it loses several thousands of dollars in value. If you buy a used car, you let someone else take that loss while you still get a perfectly good car. There are two big downsides to buying used: it takes much more time and effort to find the right car for you and you never know for sure what the history was and so you are potentially buying unforeseen mechanical difficulties.
One good way to avoid buying a car with pre-existing problems is to have that car thoroughly inspected by a qualified mechanic before you finalize the sale. Once you find the car you want and agree on the price take it to your own mechanic and have it checked out. Carfax offers a service where they will check the history of a used car and this might be a good search to preform as well. They will provide minimal information for you for free while more detailed information will cost you a fee.
What Car to Get?
My first stop when looking for a new (or, shall we say, new-to-me) car is Consumer Reports. Every April the magazine publishes an entire issue devoted to cars which includes reliability ratings of used cars and predictions for new cars. They also list used cars that are desirable and those to avoid. Some of this information is also available on their website for free.
Edmunds is another great starting point when buying a car. They have a lot of good information, advice and car reviews. They also have reviews and ratings of dealers as well as cars.
If you are an automobile aficionado and are interested in looking for information geared more towards performance than reliability, check out some of the more specialized magazines such as Car and Driver or Road and Track.
If you have no idea what make or model you want, but you know what features you are looking for, you can use a site such as Auto Trader to help you determine which cars fit your needs.
Where To Buy It From?
If you are buying a used car, you can either purchase it from a private owner or you can go buy it from either a used car or new car dealer. A new car dealer will resell some of the best cars that they take in trade. They will often provide some sort of limited warranty on the car so you can at least be assured that it won't fall apart within a week or so. You can probably get a much better bargain from a private owner than from a dealer, but you are going to have to spend a fair amount of time tracking down the right car and meeting with the owner than you would if you just drive to a lot.
The internet has made it much easier to match up buyers with sellers than it has been in the past. Here are some websites you should check out if you are looking to find a specific kind of car for sale in your area: Autotrader, Google Base, Craigslist, Cars.com, and PennySaver.
Where to Finance Your Purchase?
It's almost always better to avoid financing your purchase if you possibly can by paying cash. One way to build up this cash is to start long before you are going to need it and divert an amount each month into a dedicated savings account. Think of it as making your monthly car payment before you buy rather than after.
If you need to take out a loan, you should probably avoid financing through the car dealership if at all possible. If you have an account at a credit union, they will most likely offer the best car loan rates you can find. If you don't have a credit union account, try to open one. Some have very restrictive membership requirements, but you may find one that you qualify for. Here's a site that can help you find credit unions near you.
If you do decide to finance your purchase through the dealer, the two numbers that they will keep trying to focus on are your down payment and your monthly payment. These are not at all what you should be concerned with. What you want to keep in focus is the total purchase price (including tax, license and fees) and the loan interest rate. Ignore whatever other numbers they try to toss at you.
Lease or Purchase?
If you are the kind of person who likes to drive a relatively new car so that every few years you trade in your old one for a new one, may I humbly suggest that you could find a better use for your disposable income than diverting such a large portion of it to the big car companies? You could save an inordinate amount of money if you just keep your old car and drive it a few more years.
However, if you do insist on rapidly turning over your vehicles, you may benefit from a lease agreement rather than a loan. Here is a calculator you can use to determine which option makes more sense for you. Even if you are interested in keeping the car rather than trading it in at the end of the lease period, a lease offer may still make more sense than financing the purchase by a loan. You will have to crunch the numbers to decide which is better.
How Much to Pay?
If you are buying through a dealer, be aware that you are going to be negotiating with people who are very practiced at this. They spend their time wringing every last dollar of profit they can from people like you every day of the week and twice on Sunday. You, on the other hand, go through this process once every five years or so. Who do you think is going to end up with the better end of that deal? You need to arm yourself with as much information as possible before you set foot on the lot and then you need to maintain your focus on the bottom line and ignore all the distractions they are going to throw at you.
Firstly you need to know what the market price is for the car you are interested in. Kelley Blue Book is the standard source for finding the value of used cars, but you should also check out Edmunds True Market Value which takes into account regional variations in price. Consumer Reports offers a service where they will give you some detailed information on dealer pricing and rebates available for a new car. This report costs a fee, but it may well be worth the less than $15 they charge to have this information in hand when you start negotiating.
If you are buying from a dealer, do not let yourself be distracted by their methods. Keep insisting on the bottom line price you want to pay driving off the lot and don't let them bring in extraneous issues like your trade-in amount, extra fees or financing details. For a detailed look at what goes on behind the scenes at a car lot, check out Confessions of a Car Salesman. It is a multi-part investigative article where the author went undercover as a car salesman for a few weeks.
If you are negotiating the sale with a private party, you can use the same resources to find a fair price for your car. You should expect to pay less than you would at a dealer, but more than that person could have gotten for his car as a trade-in.
What To Do With Your Old Car?
Once you have a new car in your driveway, you may want to dispose of your old one. We keep our old cars until they can't be driven (or registered) anymore, but that's just because we find it handy to have a spare car around in case our others are in the shop or in case we want to transport something too messy for our good cars. But if you do want to get rid of it, here are your options:
- Trade it in: The easiest way of disposing of your old car is to trade it in to the dealer when you buy your next one. Not surprisingly, this is also the method that will bring you the least benefit. If you are going to trade it in, I would not let that fact be part of your purchase price negotiation. Treat that as a separate deal that you make after you have agreed on the purchase.
- Sell it to the state: I don't know if other states do this, but the state of California, in the interest of getting old polluting cars off the road, will buy cars that meet their requirements for up to $1000. The car generally has to be running, but not capable of passing the smog check. If your car does pass the smog test, it may still be eligible for buy back under other programs.
- Donate it: It used to be that donating a car to a charity was great for the former owner, because they could take a heft tax deduction, and great for the service that picked up and sold your car at auction, taking a hefty cut. It wasn't so great for the charity, since they only would get a relatively small amount compared to the value of the car, but since it was money they wouldn't have otherwise gotten, they still were happy. The IRS recently changed the rules on taking a tax deduction for donated cars that made this traditional sort of donation much less attractive. However, if you donate your car to a charity that actually fixes it up and uses it (as opposed to just selling it), you can still take the tax deduction for the fair market value. You can use Edmunds or a similar site to determine this value. One such charity is 1-800-Charity-Cars. You may find others in your local area.
- Sell it: This is by far the most onerous method of disposing of your old car, but it will bring you the highest return. You can use the sites I mention above to set a reasonable price and then to place a free ad for your car.
Frugal Tip of the Week: According to this list, November is the month to look for sales on sneakers and wedding dresses. While according to this list, it is the month to pick up a bargain on blankets and real estate in warmer climates.
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