Home >> Resource Center >> Buying A Car

BUYING A CAR

Automobile Expenses

Owning a car is a necessity for most people. We need to have safe reliable transportation for our families and to get to and from work. Car expenses have gotten out of control for many American households. Consider these recent statistics from Lending Tree

Total US based auto debt now more than $1.5 Trillion
The average transaction price for a new vehicle hit $47,870 in September 2024
Average monthly payment: $734 for new cars; $525 for used cars
Average term for an auto loan: 68 months

According to the 2024 Survey conducted by the U.S. Bureau of Labor Statistics the total Transportation costs for average family were 12% ($9,800 annual average)

Understand the total cost of ownership over the life of the car.

This includes more than just the purchase price. Paying more than you can afford to buy a car is one of the quickest ways that can really mess up your budget. Assuming your saving at least 10% of your income and your other expenses are in line with our recommendations from this guide, you should keep your total transportation costs to no more than 10% of your gross income.

In this section we will review all of the various expenses associated with owning a car…

Buying A New Car

Buying a new car is usually the most expensive option.

According to edmunds.com, On average a new car loses 11% of its value the moment you drive it off the new car lot.

During the first 5 years the car depreciates by 15%-25% each year.

After 5 years the car is worth 37% of what you paid for it at the dealership!

Negotiating Your New Car Purchase

Many people might not even realize that you can negotiate the price of a new car. They simply walk into the dealership and pay the full sticker price. Although new car prices are much more rigid than a used or demo car, most dealers are willing to negotiate with you.

Negotiating your new car purchase usually involves two elements, the price of the car you are buying, and the amount they give you for a trade in value on your old car if you have one. Both are usually negotiable.

When negotiating, let them give you a price first. Don’t ever tell them what your willing to pay for a car, or what you want your payment to be. You will certainly have an idea before you walk in, but have them tell you what the car costs first. Same goes for your trade in. They may ask you how much you were hoping to get for it. Just tell them your not sure and for them to give you a price. This will allow you to come back to them with a counter offer.

For example.

You may say you were hoping to get into a particular car for under $25,000 and hoping to get $5,000 for your trade in. Armed with this information the salesperson and the dealership have the upper hand. They may have just rolled out a new $1,000 incentive that could have made that same car $24,000 instead of $25,000. They may give you the better price, but they are under no obligation to do so. Similarly they may have been willing to pay you $6,000 for your trade in. You’ll never know. In this example giving them your price first might have cost you $2,000!

Your Trade-In

Check out your cars value before you begin shopping for a new car, by entering your cars particulars on a website like autotrader.com edmunds.com or Kelly Blue Book at kbb.com.

As you shop around to multiple dealerships, have them give you a trade in value while your looking at cars to buy. That way when its time to buy you will have a better idea of what your car is actually worth.

Dealer/Manufacturer Incentives

Car companies run incentive programs all the time. A good way to begin your research is to get your local Sunday newspaper and look at the auto section. There you should find all of the deals and specials run by all of the local dealerships. These deals can vary significantly from one dealership to the next based on each dealers current inventory and motivation to sell cars.

Be sure to read fine print. Often times what may seem like a good deal, turns out to be less than ideal because of criteria that you may not qualify for.

Common Dealer Incentives Criteria

Your already a current Owner or you are not already a current owner of a certain manufacturers vehicle. ( I’ve seen it both ways)
Active or previous military service.
Manufacturer family discounts.
Credit score, most financing terms are based on a certain minimum FICO score.

Do You Know Someone Who Works For A Car Company?

Here in Detroit, the answer to that question is almost always yes.

Employee discounts usually fall into two categories, Friends discount, and family discounts. Family discounts are typically a little more generous than a friends discount, but both can save you a bunch of money.

Don’t be afraid to ask. Most auto manufacturer employees get up to 6 discounts they can hand out each year. Most of them probably go unused. There is no risk to the employee. Its not like they have to co-sign on your loan or anything.

Although the price of the car is usually fixed when using an employee discount, dealers can still manipulate the price by adding in extras like destination fees.

Premium Features And Add-Ons

The price of the same car can also vary tremendously depending on what options packages are on the vehicle. Even cars that seem relatively similar can have major price differences. If you are serious about buying a new car take some time to understand the models options and trim packages. Sometimes you can save money by finding a car with the features you’re looking for that are part of an options package, where several features are bundled together, that may be cheaper than adding the features a la carte.

Some extras cost a lot of money

Extras like towing packages, Navigation systems and premium audio cost a lot of money when you are buying your vehicle new. Over $1,000 for each in many cases! However, you very rarely get that value back out when its time to sell your car. If these things are important to you, I would again encourage you to buy used. Often times you will not see a big price difference between a used car that has these features versus a car that doesn’t.

Demo Cars

If you are pretty set on buying a new car, but still want to get a pretty good deal, a demo car may be an option. While technically not new, these cars may have been driven by an executive or someone from the dealership for a short period of time. They tend to be less than a year old and have very low miles. If you call around, most dealerships will either have one available, or may soon have one available. If you can find one, you could save as much as 15-25% off of the full price sticker.

Be Prepared To Walk Away

In 2004 my wife and I had been shopping for a Chevy Suburban to use as our primary family car. We had been calling all the dealerships around town and finally found one that met our criteria a 2003 Chevy Suburban demo vehicle with less than 7,000 miles listed for $34,000. The car had an original sticker price of well over $40,000 because it was pretty well loaded. The car was basically brand new and even still had the original plastic wrap over the back seats.

Already the car was a pretty good deal, but my wife asked the salesman over the phone if the price was negotiable. The salesman told her it was, but said he wouldn’t provide a number over the phone, that she needed to come into the dealership to get their rock bottom price. By the way this is a common tactic many car salesman will use. I guess they figure most people once they are in the dealership, and in the process of leaving with a new car wont walk away from a deal over a seemingly small amount.

On a snowy February day my wife and our two small kids at the time, went into the dealership to buy the car. She had told the salesman over the phone that the most she was willing to pay for the car was $32,000 and he assured her that they would be able to make a deal.

When she got there and they started to work up the deal it came in at $32,500 or something like that. My wife stuck to her guns and insisted on the price being $32,000 even. The salesman insisted that it was the absolute best price he could do. My wife turned to the kids and said come on kids I guess we need to leave. You can imagine how disappointed they were, my son, who was about 5 at the time, had actually brought a movie with him that he was planning to watch on the DVD entertainment system that was in the new car.

As they started packing up their things and getting their coats back on the salesman said. Ok We can sell you the car for $32,000.

$500 may not seem like a lot of money, but I am pretty sure that at the time it was a lot more meaningful to us than it was for the car dealer.

The moral of the story. Be prepared to walk away. There will always be another deal!

Buying A Used Car

My recommendation is to buy a car 1-3 years old with relatively low mileage, ideally under 40,000 miles. Look for a car that has a good history as a high mileage vehicle, something that routinely goes for 150,000-250,000 miles without major issues. Do some research, read reviews and check out a used car website like auto trader to see how these cars are holding their value.

Once you have narrowed down your new car picks to a handful of models you can begin your search. After you get into it, you should be able to get an idea of what kind of a deal you may be able to get. Used car websites like auto trader make this process pretty easy. You can select the make and model you are looking for and then narrow your search by price, mileage, and model year. If you register with the website, (which is free), you can save your searches, and even set up notifications via email or text message to let you know when new cars meet your search criteria.

Buy A Used Vehicle Report like CarFax

Once you have found the used car you want to buy, you have financing in place and you and the seller have agreed on a price, before you pull that final trigger, get a used vehicle report like CarFax. It will cost you about $30-40, but it is well worth it. The report will have details about any reported crashes that the vehicle may have been in as well as including information about the cars title and if there is any evidence that the odometer has been rolled back.

How Long Should You Keep Your Car?

Driving your car as long as possible is usually the best way to get the most amount of value out of your car purchase. This can be hard, especially when all of your friends may be getting new cars. Often times, we just get tired of the same old thing. A good way to motivate us into keeping our car longer is to take good care of it, and to get the car detailed periodically. Detailing might set you back $100-200, but if done right, will make your car seem almost as clean as it was when you bought it. Besides, a one time $200 detailing fee is a lot less expensive than a new car payment that could be $300 per month or more!

Leasing A Car

Leasing is appealing to many people because it can be a way to keep your monthly payment lower, while aways being able to drive a relatively new car.

With a lease you will rarely have any maintenance issues that would not be covered under warranty. Typically just routine maintenance like oil changes. Depending on the how you drive and the length of your lease, you probably wont even have to buy new tires or brakes for your car.

Personally I’m not really a big fan, primarily because I don’t like being forced into a new car when my lease is up. By buying and owning my cars outright, I can trade in the car on my terms. I do however take on more risk, especially with my strategy to buy a slightly used car, that I will have to pay for repairs that may not be covered under warranty. I think its worth it, and it has worked out well for me over the years. Just make sure you keep an adequate emergency fund in case any repairs do come up.

Understanding Your Lease

Acquisition cost

Fee charged by the bank that is financing the lease and can range from $400-$800. Although banks charge a base acquisition fee, dealers are permitted to mark it up. Know what the base acquisition cost is.

Capitalized Cost

Even though you are leasing and not buying, its still important to know the capitalization cost of the car you’re leasing. Your finance charges or interest, will be based on the capitalized cost.

Disposition Fee

Fee charged by banks to cover the cost of disposing or selling the car when the lease ends. Because its charged at the end this fee often comes a surprise to many consumers. Some banks will agree to waive the disposition fee if you are leasing another vehicle with them.

Mileage allowance.

Leases come with a set number of miles that you are allowed to drive over the course of the lease. Lease advertisements will typically specify the price for a low mileage lease like 10,000 miles per year. Additional miles will usually cost you less if you prepay them upfront or include the cost in your monthly payment. Turning in a lease that has more miles than you agreed to can cost you .10 – .20 cents for every mile over the limit.

For example, If you had a 3 year lease with a 30,000 mile allowance, but turned in your car with 36,000 miles. At .15 cents per mile it could cost you $900. (6,000 x .15 = 900)

Security deposit

Some leases may require to put down a security deposit.

Excess wear and tear

If you turn in your lease vehicle with excess wear and tear you could get an additional bill. Excess wear and tear can include interior or exterior scratches, Stains, anything not working or broken, dents, excessive tire wear for the term of the lease etc.

Financing Costs

Know your credit score! Often times dealers will advertise low lease rates or special financing terms like 1.9% or 0% interest loans. These rates are typically only available to borrowers with the highest credit scores, usually a FICO score above 750. If your FICO score is between 700 and 750 you may still be able to get a decent rate, however borrowers with low FICO scores under 700 may pay an interest rate of 10% or more to finance their vehicle.

Car Financing Rules

If your FICO score is under 700, you should be buying the cheapest reliable form of transportation you can get your hands on. Ideally something that you can pay cash for. Or, just keep what you have until your situation improves.
Finance for no more than 60 months. Ideally 48 months. If you can’t make the payments then buy a cheaper car.
Never have more than 1 car you are paying on in your household at any one time.

Good Credit vs. Bad Credit Example

If you have a good FICO score you could potentially qualify for a low promotional finance rate of say 2% interest. If you financed $25,000 for 5 years at that rate your monthly payment would be $438.19 per month.

On the other hand if your credit was not as good your rate could be 9% or higher. At 9% interest that same $25,000 car loan for 60 months would be $518.96 per month! Over $80 more per month or close to $1,000 more per year!

*Subprime car loans given to those with Credit scores between 501-600 have an average interest rate of 11.5 to 14.1% and now make up 30% of all car loans.

*2024 Market Watch

Add Your Heading Text Here

Check Out Our Video Library!

How Much To Contribute To a 401k Plan

3 Things You Should Know Before You Rollover Your 401k

How To Unlock the Full Potential of Your 401k Plan

4 Strategies to Get the Most Out Of Your 401k Plan

Quick Links

Lethemon Financial

About

Let’s Connect