Advice on Car Shopping

“The most exasperating car trouble is when the engine won’t start and the payments won’t stop.”

- Evan Esar -

The car-buying process is complicated...

Any major purchase can be stressful, but buying a car is on another level. A vehicle is a depreciating asset that guzzles your money through gas, repairs, maintenance and insurance, and the process for buying one can be complicated and stressful. You have several options when purchasing a car. You can buy new, used, or certified pre-owned. You can buy straight from a dealership or from a private owner. You can buy a car entirely online and have it delivered to your door. First, the basics.

Understand Your Budget: Before you buy your next car, you should consider your monthly budget and how owning a car will fit into the big picture. Don’t just consider the auto loan payments, if you will have one. Be sure to also factor in the monthly costs of owning a car, such as auto insurance, gas, parking, and maintenance. Even new cars can need costly and unexpected repairs, or you may get into an accident and have to deal with insurance - both the cost of meeting your deductible and the significant increase in premiums after your accident.

In general, you should plan to review the following items for potential maintenance at least once a year: Oil changes, windshield wiper replacements, fluid replacement, new batteries, brake pad replacements, new tires and tire rotations, and other routine car maintenance services. According to an AAA study, routine maintenance and repairs on a new car could cost an average of $0.09 per mile. If you drive 10,000 miles in a year, you'll spend $900. If you drive 20,000 miles per year, that figure rises to $1,800. That’s just anticipated routine maintenance. There are gas calculators online so you can estimate your fuel costs. The average driver will put about 12,000 miles a year on their vehicle.

Fuel mileage will vary significantly depending on what type of vehicle you have, but assuming a 12,000 per year mileage, an average cost of $3.00 per gallon, and a fuel efficiency of 20 mpg, you will spend over $1,100 a year on fuel alone. That’s why it is critical to budget for these costs. Only after you've established a clear picture of your monthly finances should you consider how much car, truck, or SUV you can afford. Set yourself a flat dollar amount for the out-the-door price on the vehicle. When you are financing, do not consider how much of a monthly payment you can “afford”, as this can easily be manipulated and you will end up buying more than you need.

Before you buy your car, you can also get quotes from insurance companies. Especially if you are a young driver, your auto insurance can be more than your car payment! According to NerdWallet's 2022 rate analysis, the national average cost of car insurance is $1,630 per year. This varies significantly by region and a plethora of other factors. You need to get an overall sense of how much the car will truly cost you annually, considering all the costs: car payments, gas, insurance, maintenance & repairs.

Choose the Appropriate Vehicle: Once you've determined your budget, you can start looking for vehicles that suit your needs and lifestyle. Consider how many people you'll be transporting, as well as how much space you'll need for everyone's belongings. Consider where you drive, the road and weather conditions, and the distance you travel. Gas millage and general reliability should be important to you. Some cars require premium oil changes and even minor repairs and maintenance can be more expensive depending on the make and model.

BMW’s, Mercedes-Benz, and Jeeps are some of the most expensive cars to maintain, and Toyota’s and Honda’s are some of the least expensive in terms of maintenance. Don't just consider where you are now; consider your car's needs in a few years. Are you expecting children, will you need to transport aging parents, use your vehicle for work, or have other specialized needs? Unless you are leasing, plan to have your vehicle at least 5 years, and choose something you can live with for a while, as its expensive to buy and sell new cars every few years - remember this asset depreciates, and sometimes quite heavily.

Do Comparison Shopping: Shopping at multiple dealerships is one of the best ways to get a good deal on a new or used car. Different franchised new car outlets can pay different dealer costs for the cars they sell due to discounts and bonuses. If one dealer has met their sales goals and another hasn't, the dealer who hasn't will be more incentivized to make you a deal, especially if the sales period is coming to an end. Car buyers looking for pre-owned vehicles from private sellers should look at a variety of vehicles in the area as well.

Prices are frequently determined by local supply and demand, so can vary. You could save money by traveling out of state in some circumstances, so widen your geographic search criteria. Having other options will give you the security and peace of mind you need to walk away from a car if it isn’t the best fit for your needs. Fortunately, you no longer have to spend hours driving from dealership to dealership negotiating the prices of new or used cars. You can instead visit their websites or negotiate by emailing them. There's little reason to visit a car lot aside from the test drive, used car appraisal, and final paperwork. If a car seller offers you a price, make sure to print or email the offer. It can be useful if they experience amnesia when you arrive at their door.

Most purchases we make don’t have room for negotiation. However, when you buy a car, whether new or used, there is some room for haggling. And because cars are expensive, (and only rising in price since the pandemic started) even a little negotiation could save you thousands. Here are some tips to negotiate in person at the dealership, which can employ some pretty high-pressure sales tactics and certainly be a stressful process.

Conduct Initial Research: Do your research before heading to the car dealership. There are a number of well-known online resources, such as Kelly Blue Book or Autotrader, that will show you the manufacturer's suggested retail price — that is, the price at which the vehicle should be sold at. It can also help you determine how much you might be able to negotiate with a dealership versus a private seller. You can also look into different dealers in your area to see what special incentives they may have that could help you save money. These include: cashback deals, price reductions on specific models, zero percent financing deals, or holiday-driven sales deals.

Use the Dealer's Cost as a Leverage: Online resources such as Kelly Blue Book and Autotrader can also provide you with the dealer's cost — or the invoice price for your preferred vehicle. If it's a used car, look for the book value, which is the original cost minus depreciation. Use this information as a starting point for your negotiation. Rather than negotiating on the manufacturer's suggested retail price (MSRP), focus on the dealer's invoice cost (or the car's book value). Your wiggle room is typically the difference between what the dealer paid the manufacturer (or previous owner) and the price listed on the lot.

Obtain a Pre-Approved Loan: One of the most important pieces of advice regarding the car-buying process is to obtain a pre-approved auto loan before visiting a dealership or purchasing privately. You can get an offer that a dealer will have to meet or beat if you apply to at least one local bank, credit union, online bank, or online lender.

Today's dealerships make a sizable portion of their profit by acting as middlemen between lenders and buyers. They mark up financing costs from third-party lenders and offer them to buyers as part of a larger car-buying package. In many states, they are not required to disclose the rate offered by the lender prior to their markup! It could save you thousands to apply for private financing directly with a bank or credit union. Don’t feel an obligation to stick with your current bank to service your auto loan - shop rates with several financing institutions so you pay the lowest overall interest. Credit Unions tend to be very strong with auto financing.

Avoid Long-Term Loans: As the cost of cars, trucks, and SUVs has risen, so has the length of auto loans. It's easy to find lenders who will give buyers six-year or longer loans, but it's not a good idea to have one that long. You'll typically pay a higher interest rate and a much higher total interest amount over the life of the loan. The longer the loan term, the more likely it is that you will owe more on the vehicle than it is worth, a phenomenon that is known as “being underwater”.

You'll also be more likely to have costly out-of-warranty repairs while still making monthly car payments. If you get your financing from a dealership, keep in mind that their primary goal is to sell you the car. Using tricks like lengthy loans (which will lower your monthly payment, but cost you much more in the big picture) is simply a way to sell more cars. It's also a good idea to survey the loan market a few months after receiving your new or used car to see if you can get a cheaper auto loan by refinancing.

Credit unions and community banks are industry leaders in car loan refinancing, frequently shaving a few percentage points off existing interest rates. Sometimes a loan is a good thing. Remember a car is a depreciating asset, so paying in cash, especially for a higher-cost vehicle, could lose you money because you are not investing it. Having loans is essential for building good credit. Credit reports don’t just look at on-time payments, there’s a diversification factor (discussed in much further depth in the Credit Chapter). Having an auto loan you responsibility pay off will help your overall credit rating, which will help you get better interest rates for other purchases. Put some money down, and get a short-term auto loan (3 years is recommended) with excellent terms and you will see credit benefit.

Timing: Some times are better than others to visit a dealership. Ignore the advice from some that you should go right before closing time – this does not work. Instead, you should shop near the end of a month, quarter, or year. Dealers and salespeople have sales goals, and they are more likely to give you a better deal if they only need a few more sales to meet their next bonus. Weekend shopping is fine if you're just browsing or have a lot of time to buy a car. Dealerships are typically at their busiest, and if you don't appear to be a serious buyer, they will most likely leave you alone.

When you decide to buy, expect to set aside several hours to negotiate a price, take a test drive, have your trade-in appraised, and go through the finance office. Weekdays and evenings at dealerships are much quieter, so you may be able to get in and out in less time. Set aside the whole day if necessary to go through the process. Don’t go to the dealership hungry, or bring snacks. They may provide coffee or water, but the high-pressure sales tactics mean making it difficult to walk out the door. If you are hangry and just want to get it over with, they have more leverage. Be prepared to spend the necessary time it takes to test-drive, negotiate, and sign paperwork. Of course, you can do a lot of it online these days, making the process much quicker. However, the process always seems to always take more time than expected, so never allow yourself to feel rushed.

It's OK to Walk Away: Prepare yourself for the possibility that you will not be able to leave that day with your desired vehicle. It is better for your mental health and your bank account if you do not allow yourself to be pressured into a bad deal. If you have a shortlist of dealers and private sellers for the vehicle you want, it will be easier for you to walk away. Of course, it may be that you are purchasing a unique car and you don’t have many options, but if you are considering a common vehicle, you can be assured there will other opportunities to purchase a car exactly like that one at another dealership or privately; so feel free to walk away if the person you are working with is giving you a hard time. Liking the salesperson or private owner of the vehicle isn’t a good enough reason to pay more either. At the end of the day, it’s just business.

Look for Deals: When a vehicle is nearing the end of its product cycle or isn't selling well, automakers will provide special incentives to encourage sales. These deals typically include cash back, lower interest rates, or a combination of the two. Use an aggregator site to get a sense of what the median market price for the car you are looking for, so you can see the range of prices available. A lower sticker price could translate to thousands of dollars off interest payments over the life of the loan.

Look at Previous Model Years: Between major model redesigns, automakers typically make very few changes. If you're looking for a vehicle that hasn't changed much since the previous model year, you could save a lot of money by buying the previous year's model. You can use any car finder to locate those models in local dealer inventory, or you can use the search tool on each automaker's website.

Consider Certified Pre-Owned Vehicles: New cars can be costly, but used cars often have unknown histories and no warranty coverage. However, there is a third option known as a Certified Pre-Owned (CPO) vehicle. They are low-mileage used vehicles that have been inspected and certified by dealers representing the automaker that built them. They include warranty coverage and other benefits that you would not receive if you purchased a non-certified used car. They are typically more expensive than other used cars, but also far less expensive than a new model.

Consider Buying From Car Rental Agencies: You've probably seen some former rentals on the lots of used car dealerships. Ex-rental vehicles have advantages and disadvantages in terms of mileage, maintenance, model year, resale value, and other factors. Rental car companies prefer newer vehicles. Rental car companies sell their "older" vehicles, which are usually only a couple of years old, to make room on their lots for new vehicles. Rental cars that are two years old may have more advanced technology and safety features than single-owner cars of the same age. However, a one- or two-year-old rental car will typically have more miles than a comparable privately owned vehicle.

Although a rental car may have been driven aggressively, it was most likely well-maintained. Most reputable rental companies adhere to maintenance schedules and employ qualified in-house mechanics. Many rental car companies take such good care of their vehicles that they provide warranties and other coverage to sweeten the deal. Hertz, Enterprise, and Avis all provide powertrain warranties of 12 months/12,000 miles. Many are still covered by the manufacturer's warranty. Many customers are more aggressive with rental cars than they would be with their own. However, more frequent maintenance and servicing may compensate for those "tough" miles.

It’s easy for a private owner to forget to change the oil on schedule or to ignore the check engine light, but a rental car company will be on top of any maintenance issues right away. Rental companies buy new cars in bulk at a discount and sell them to replenish their inventory, so they can often offer lower prices, as their primary goal in selling used cars is not to make a large profit. Avis, Enterprise, and Hertz all have simple websites for searching for used cars. All three offer no-haggle pricing, so you'll know what to expect right away.

Both Avis and Hertz offer a three-day test drive with a refundable rental fee if the customer purchases the vehicle. Enterprise offers a 7-day trial period. Keep in mind, a former rental may be less expensive up front, but it will also return less money in the long run. Obtaining the highest resale value for a used rental car is difficult because many buyers are wary of purchasing previously rented vehicles, so much so that some states have passed laws allowing car dealerships to refer to rental cars as "program cars" in order to avoid the stigma. The fact that these vehicles are sold in such large quantities also has an impact on their value. When the market is flooded with thousands of cars of the same make and model, all arriving at roughly the same time and with comparable mileage, the price of that make and model falls.

Obtain Vehicle Reports & Inspections: Buyers who choose an uncertified used car must take a few extra steps before making an offer. To begin, you should obtain a vehicle history report from a site such as Carfax or AutoCheck. It will inform you of a vehicle's accident history, title status, repair records, and other information. If you see any red flags on the vehicle history report, it should either put a stop to your purchase or point out issues that need to be investigated further by an independent mechanic before you consider purchasing the vehicle. If the seller refuses to allow a pre-purchase inspection by a mechanic of your choice, you should not purchase the vehicle.

Some sellers will provide you with an AutoCheck or Carfax report, while others will require you to purchase one on your own. Fortunately, these companies provide multi-report packages, so you don't have to pay full price for each vehicle when you are shopping multiple options. The report's most important sections are the reported accidents and the vehicle's title status. Sellers can easily move vehicles across state lines to obscure their current title status, but the report should show the car's entire title history. It's worth noting that recent collisions and repairs won't appear on a vehicle history report right away. Avoid salvage titles.

Research Your Trade-In Value: You should have a good idea of the value of your old car before negotiating the trade-in value with a car dealer. A variety of online sources can provide you with a range of trade-in values based on the vehicle's equipment, mileage, condition, and age. These online calculators may offer less money to you since a certified mechanic is not checking out the vehicle before the trade-in offer is presented. When estimating the value of your vehicle, be realistic; otherwise, the estimate will be inaccurate. Offering your trade-in to other dealers or used car superstores is another way to get a reasonable estimate of its value. There is no requirement that you sell it to the dealership where you purchase your new car, though doing so may reduce your sales tax liability. If you don't know the value of your trade-in, the salesperson can manipulate the amount to make it appear as if you're getting a great deal on your new car.

Separate The Transactions: When you begin negotiating the price of your new or used car, the salesperson will almost certainly attempt to combine the vehicle's price, the value of any trade-in, the cost of financing, and any down payment into a confusing stew of numbers that produces a monthly payment. Smart car buyers prefer to keep each of those transactions as separate as possible, focusing solely on the cost of the vehicle. Knowing the worth of your trade and having a pre-approved financing offer in place can help take the guesswork out of the equation. But don't be surprised if the salesperson keeps trying to entice them back into the equation. Maintain a polite focus on the car's price and be prepared to walk away.

There are some aspects of a car purchase that can be negotiated and others that cannot. Make any price concessions in exchange for something, such as floor mats or lifetime oil changes. Fees can range from 8% to 10% of the purchase price of a vehicle. According to state and federal laws, the dealership is allowed to charge and must disclose certain line items to you. These fees are not negotiable in any way. That is, if you don't like a $100 fee, you can ask the dealer to deduct $100 from the car's price. So you've saved $100. However, for legal reasons, your contract will still include the $100 fee. Below are the fees you should know about.

Documentation Fee: $85-$1,100:The documentation fee, also known as the "doc fee," covers the cost of preparing, printing, and filing that multicolored, thick stack of forms with your lender as well as state and local governments. The monetary value varies by dealership. Some states, such as California, set doc fee caps — the Golden State's doc fee cap is $85. The average doc fee in Florida, which has no cap, is around $700, but it can go up to $1,100.

Destination Fee: $800-$1,700: If you're buying or leasing a new car, you should budget $800 to $1,700 for the destination charge, also known as a freight charge. This is the cost of transporting new cars from the factory to the dealer. Because dealerships used to inflate this fee to absurd proportions on the spur of the moment and conceal it in the manufacturer's suggested retail price (MSRP), it is now federally regulated. It is a standard, separate fee that you must pay regardless of whether you pick up the new car off the assembly line or buy it 500 miles away from the manufacturing plant.

Inspection Fee: $7-$30: Before a dealer or private owner can sell a vehicle in many states, it must first pass a state safety inspection (and, if your state requires it, an emissions inspection). Dealerships may then pass on that cost to you. State inspection fees are typically low, ranging between $7 and $30.

Taxes, Titles, & Licensing Fees: Varies: When you buy a new or used car, you must register it with your local government. The rules differ from state to state, but the basic fees are tax, title, and license (TT&L). These include sales, property, and/or use taxes (if your state levies them), as well as the cost of a new title proving ownership and a license plate. Your state, county, or city may levy additional fees; for example, California has a calculator you can use to estimate the cost of registering a vehicle there. Dealerships handle much of the process on your behalf, so you pay them fees, which they then forward to the appropriate entities.

A visit to the finance office to sign the final paperwork is one of the final steps in purchasing a car from a dealership. It's also where you'll be offered a variety of add-on products and services, such as extended warranties and nitrogen in the tires. Though there will almost certainly be some pressure applied so that the dealer can include the products with your financing, you should usually avoid these options. In general, you don't want to finance add-ons because you'll be paying interest on the purchase for the duration of your car loan. In addition, you can usually find these same services elsewhere at a better price. Oftentimes, a much better price! Here are a few add-ons to waive at the dealership:

Appearance Packages: Window tinting, wheel locks, and paint sealant are examples of appearance packages that the dealer may try to sell you at a premium. Car window tint film costs $46, a bottle of paint sealant costs $20, and a set of wheel locks costs $15 on Amazon, for a total of about $80 in materials. Even if you pay a local auto shop to install these products rather than tackling the DIY project, you'll likely save hundreds of dollars. Typically, dealerships sell appearance packages for around $1,000. If you want them, try to negotiate a lower price or ask the dealer to include them for free. But like most add-ons, they aren’t worth it, and may be an outright rip-off!

GAP Insurance: Guaranteed Asset Protection, or GAP, covers the "gap" between what your car is worth and what you owe if your auto insurance company declares your car a total loss. This is most relevant with new vehicles, typically under 3 years old. Unfortunately gap insurance at the dealership can run between $600 - $900 annually. However, you can usually purchase gap coverage as an endorsement or add-on to your existing auto policy and it typically costs less than $100 a year through your auto insurance. That’s a huge savings!

Loan Protection Insurance: If you were suddenly unable to make your car payments due to a job loss, illness, or even death, loan protection insurance would pay off the remainder of your loan balance. It typically costs 0.02% to 0.05% of the loan amount. These price points undercut the value of such a program. There is almost no scenario in which purchasing this type of insurance would be recommended. The criteria can be strict as well, leaving you in the lurch when you thought you were covered. You would be much better off purchasing straightforward disability insurance or life insurance (which can have disability riders) to better cover your whole financial picture, not just the car loan portion.

A vehicle service contract, also known as an extended car warranty, is intended to do exactly what it says: extend protection after the manufacturer's warranty expires. Dealers sell them, but they aren't usually the ones who back them up. Check to see if the company providing the extended warranty is reputable, and read the fine print to see what type of labor and parts are covered and for how long. Dealers typically try to sell them for $1,800 to $2,500, but there are other options. Many people love warranties, but having a good relationship with a local mechanic can be just as beneficial. Financially, extended car warranties aren't worth it. Consumer Reports found that individuals who buy extended warranties save less than they spend for the contract. The types of car warranties are as follows:

Bumper-to-Bumper warranties are the most complete extended warranty. It covers all of a vehicle's parts and systems, barring wear and tear.

Powertrain warranties include everything that drives the vehicle, including the engine, transmission, and any power components that travel to the wheels of the car.

Drivetrain warranties are comparable to powertrain warranties, but exclude the engine.

A Wrap warranty covers the car's rest in addition to the powertrain. This practically gives you bumper-to-bumper coverage.

A Corrosion warranty will cover automotive rust damage.

A Tire & Rim warranty covers the cost of patching, repairing, or replacing your vehicle's tires or wheels if they are damaged by a road hazard. Tires are costly, but they are a relatively infrequent purchase. Also, many auto body shops will plug a hole in your tire for free, and tires typically run between 100-200 each - so a new set will knock you back 400-800. However, these tire and rim programs usually run about $800 annually so you are better off buying new tires when you need them - which usually won’t be every year.

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