photo credit: deansouglass

SavvyBro recently sought my advice on buying a new (to him) car.  So I decided to share with you guys a little of what I told him.

• Consider the total cost of ownership - The true cost of buying a car is much more than just the purchase price.  For example, in most states, you will be charged sales tax.  This can easily add several thousand dollars to the final cost.  So just because you have $15K to spend doesn’t mean  you can buy a $15K car.  Also, you need to weigh the increase in your insurance premiums and possibly your gasoline costs (for example, if the new car gets less gas mileage or requires a higher grade of gas).  Also, maintenance and repairs often cost more for foreign or ‘luxury’ cars.  These are all things to be considered before you make a purchase.
• Increase your emergency fund before you buy a car - Unless you’re paying in cash (the best option), you should increase your e-fund.  By adding a car payment to the mix, your expenses will increase and your cash cushion should increase as well.
• Put money down - Not having a down payment is a good way to become ‘upside down’ on your car.  If you don’t have a down payment, your car is likely to depreciate faster than you can pay down the principal at first.  This means you’ll owe more than the car is worth (being ‘upside down’).   This is a perilous situation because if something happened to the car (stolen or totaled), your insurance would not cover the full amount of the loan and you’d have to come out of pocket.  You can avoid that by purchasing gap coverage from your insurance company but that’s just one more thing to increase your expenses.
• Avoid long financing terms - In my opinion, financing a car for more than four years is a sure sign that you can’t afford it.  In addition, you’re almost guaranteed to be upside down on your loan for years to come.  Strive to finance your car for three years and pay it off even sooner.  This may mean saving a higher down payment or consdering a lower price range.
• Skip the extras - Once you’ve come to an agreement (if you’re purchasing from a dealer), don’t allow yourself to be upsold.  Cars today are quite reliable and can be reasonably expected to last well over 100K miles.  Extended warranties and such are just a way to separate you from your money.  The same can be said for rustproofing and other last minute add-ons the dealer will try to sell you.  Steer clear of these.
• Don’t rush - Buying a car is a major financial decision.  Don’t let a dealer or anyone else rush into making a purchase before you’re ready and have had a chance to evaluate all the details.  Dealers often try to ’sell’ you or convince you that a deal (or that particular car) is only available for a limited time.  Don’t fall for it.  Take 24 hours to cool down and look at the deal in a less-pressured environment.
• Be smart about financing - While there are some very good dealers, the bad ones cause them all to get a bad rap.  Check your credit score and credit reports before you even start searching for a car.  This way you can be informed and know what to expect in terms of financing.  Often your local credit union will be able to offer you better rates than a dealer.  In addition, they can usually give you a rough estimate of the rate you can expect without pulling your credit.  If you don’t like the terms of the financing, go elsewhere.
• Last but not least, educate yourself on the process ahead of time (I guess this should have actually been first) - There are fantastic resources out there from the internet to your local credit union to your friends and coworkers.  Research the various models of car, their reliability ratings, insurance costs, etc.  Find out about what financing is available and what you can expect.  Learn about the various auto options offered and what you need and what you can live without.

Have any of you bought a car recently?  What was your experience like?