How to Buy a New or Used Car - A Guide to Budgeting and Saving for your Next Car
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How to Save for and Buy a New or Used Car
I've been on both sides of the deal, buying and selling cars, and there are some things you should definitely know to do before driving up to the dealership.
I also wanted to talk about budgeting for and saving for a car purchase, because if done correctly, you can get a lot more out of your next car purchase, with less stress and hassle.
I also wanted to talk about budgeting for and saving for a car purchase, because if done correctly, you can get a lot more out of your next car purchase, with less stress and hassle.
The Dealership/Car Buyer Relationship - Who's the Bad Guy?
Who IS the bad guy in the dealership/car buyer relationship? Well, neither one, but each side has their guards up the moment the customer hits the lot.
First off, let's look at the car buying experience.
Many people look at dealerships as shark tanks, full of hungry car salespeople and managers joyfully prepared to take an unfair chomp out of your bank account.
That image is prevalent and is mostly accurate.
Salespeople ARE hungry for a sale, any sale, due to the incredible competition at most car lots. Are they the bad guys? Not really. They're just doing their jobs, as they've been trained.
Car dealerships, both new and used, are MOSTLY on the up and up. They do the things they do because of competition with other dealerships, high customer turnover, customer indecision and difficulty in processing financing. It's a cutthroat business and car buyers get caught in the middle.
The vast majority of people finance their cars. Most people can't just set down 20-60k on a car. That's understandable, but it has made car dealerships defensive because they have to deal with your credit, which for many customers is just awful.
Many people feel like pigeons when entering a car lot, and maybe that's how some sale-sharks see them, but managers see financing liabilities.
As a defense to car dealership tactics, buyers stall, joyride, and otherwise waste time. As one manager once told me, "If I came to your place of work, and played with all of your equipment for hours on end, and then didn't do business with you, how would you feel?" Although you are never obliged to buy at any dealership, he had a point.
Does that make the car buyer the bad guy? Of course not, not any more than the car dealership is full of bad guys just because they are aggressive.
There is a decades-long history of 'trying to get people in cars' vs. 'trying not to get hosed' which has produced bad blood and forced buyers to be unsure of even the most highly reputed dealerships.
Buyers don't trust dealerships, and vice-versa.
Frankly, I think the paradigm of the current car dealership structure is archaic and should be done away with. Companies like Saturn have changed the way people do business at a car dealership, sort of. Until people can pay for cars with cash, however, the current car dealership system will never change.
So what's the solution? Better saving and budgeting and more savvy car research.
First off, let's look at the car buying experience.
Many people look at dealerships as shark tanks, full of hungry car salespeople and managers joyfully prepared to take an unfair chomp out of your bank account.
That image is prevalent and is mostly accurate.
Salespeople ARE hungry for a sale, any sale, due to the incredible competition at most car lots. Are they the bad guys? Not really. They're just doing their jobs, as they've been trained.
Car dealerships, both new and used, are MOSTLY on the up and up. They do the things they do because of competition with other dealerships, high customer turnover, customer indecision and difficulty in processing financing. It's a cutthroat business and car buyers get caught in the middle.
The vast majority of people finance their cars. Most people can't just set down 20-60k on a car. That's understandable, but it has made car dealerships defensive because they have to deal with your credit, which for many customers is just awful.
Many people feel like pigeons when entering a car lot, and maybe that's how some sale-sharks see them, but managers see financing liabilities.
As a defense to car dealership tactics, buyers stall, joyride, and otherwise waste time. As one manager once told me, "If I came to your place of work, and played with all of your equipment for hours on end, and then didn't do business with you, how would you feel?" Although you are never obliged to buy at any dealership, he had a point.
Does that make the car buyer the bad guy? Of course not, not any more than the car dealership is full of bad guys just because they are aggressive.
There is a decades-long history of 'trying to get people in cars' vs. 'trying not to get hosed' which has produced bad blood and forced buyers to be unsure of even the most highly reputed dealerships.
Buyers don't trust dealerships, and vice-versa.
Frankly, I think the paradigm of the current car dealership structure is archaic and should be done away with. Companies like Saturn have changed the way people do business at a car dealership, sort of. Until people can pay for cars with cash, however, the current car dealership system will never change.
So what's the solution? Better saving and budgeting and more savvy car research.
Dos and Don'ts of When, Where and How to Buy a Car
Let's first discuss some tips for buying a car.
Most people get a list of cars and features, line up some dealerships and make a day of it on Saturday or Sunday. This is also when most dealerships make their sales, but that's ok. There's a better way to do things.
DO - Visit the dealership on a non-holiday weekday. The lot will be more quiet, and the dealership will be at normal energy levels because they aren't rah-rahed by weekend activity. You'll get a better negotiated deal on a weekday because they are more eager to make a deal on low-volume days.
DON'T - Go on the weekend. I know, you have more time, and they're advertising all kinds of cool deals! (which are mostly for suckers). You'll get excited, rush into a deal and leave money on the table.
DO - Go in closer to closing, like 8PM (most dealerships are open until 10PM). If you go long and your deal is being processed/negotiated, they'll stay open just to finish you up. Stay firm and you can make a better deal. You'll get a fine deal any other time of the day but they are motivated to sell when it's late in the day.
DO - Go on the last day of the month. All dealerships want to pad their numbers each month and they will give you a better deal then. You'll get a fine deal any other time of the month, but they are motivated to sell when it's late in the month.
DON'T - Go when you're in a hurry. If you are forced to make a decision, you'll make a bad one. Don't go to tent sales for just this reason. You'll only have one shot at a deal, and you'll rush.
DO - Go to a dealership that sells new and used cars. New dealerships have used cars too. Used dealerships only have used vehicles and they try to sell them like they are as new as possible (new car dealerships do the same thing, but at least you can compare their new and used stock)
DON'T - Go when its raining, really hot or really cold or while other adverse weather is going on. The closer you get to a deal, the more you'll rush just to get done with it. Dealerships love rainy days. Traffic is down, but sales on people that do show up are way up due to impulse deals.
DO - Buy this year's model at the end of the year. If you're looking at 2008s and the 2009s are out, make a hard bargain on the 08 toward the end of 2008. They need to move them and you'll get the better deal. You'll get a fine deal all year, but at the end of the year they are more motivated to sell (see a theme here?)
Review:
Best time to buy? - End of the day, end of the month, end of the year (especially outgoing same year models), preferably a pleasant sunny weekday when you have all the time in the world and are not being rushed.
Most people get a list of cars and features, line up some dealerships and make a day of it on Saturday or Sunday. This is also when most dealerships make their sales, but that's ok. There's a better way to do things.
DO - Visit the dealership on a non-holiday weekday. The lot will be more quiet, and the dealership will be at normal energy levels because they aren't rah-rahed by weekend activity. You'll get a better negotiated deal on a weekday because they are more eager to make a deal on low-volume days.
DON'T - Go on the weekend. I know, you have more time, and they're advertising all kinds of cool deals! (which are mostly for suckers). You'll get excited, rush into a deal and leave money on the table.
DO - Go in closer to closing, like 8PM (most dealerships are open until 10PM). If you go long and your deal is being processed/negotiated, they'll stay open just to finish you up. Stay firm and you can make a better deal. You'll get a fine deal any other time of the day but they are motivated to sell when it's late in the day.
DO - Go on the last day of the month. All dealerships want to pad their numbers each month and they will give you a better deal then. You'll get a fine deal any other time of the month, but they are motivated to sell when it's late in the month.
DON'T - Go when you're in a hurry. If you are forced to make a decision, you'll make a bad one. Don't go to tent sales for just this reason. You'll only have one shot at a deal, and you'll rush.
DO - Go to a dealership that sells new and used cars. New dealerships have used cars too. Used dealerships only have used vehicles and they try to sell them like they are as new as possible (new car dealerships do the same thing, but at least you can compare their new and used stock)
DON'T - Go when its raining, really hot or really cold or while other adverse weather is going on. The closer you get to a deal, the more you'll rush just to get done with it. Dealerships love rainy days. Traffic is down, but sales on people that do show up are way up due to impulse deals.
DO - Buy this year's model at the end of the year. If you're looking at 2008s and the 2009s are out, make a hard bargain on the 08 toward the end of 2008. They need to move them and you'll get the better deal. You'll get a fine deal all year, but at the end of the year they are more motivated to sell (see a theme here?)
Review:
Best time to buy? - End of the day, end of the month, end of the year (especially outgoing same year models), preferably a pleasant sunny weekday when you have all the time in the world and are not being rushed.
Saving and Budgeting
Regardless of your credit, the best way to buy a car is with cold hard cash. I know, that's a lot of money! The greatest benefits of buying your car in cash are no credit issues, no hassle at the dealership, and an overall better deal because you are negotiating the actual price, not the financing terms.
With some careful planning and saving, you can get a great new car without breaking your bank account or getting caught in long term financing.
The best time to start saving for a new car is when you've just bought one. Most new cars are traded in after 3-6 years. This is the time you should be saving for the next one.
If you don't have a car, but want one, you need to start saving up in order to have the funds available by a set date. You should plan to save for at least 3 years. This sounds like a long time, but if you're in college, driving your first beater, this is the perfect time to start so you can graduate with a brand new set of wheels.
How Much Should I Save?
You need to start saving so much a month. How much? That's up to you, but lets crunch some numbers.
If you save $250 a month and put it in an interest bearing account (I recommend ING Direct which currently offers 3% which is typically better than you'll get at your bank). Open an account and set your direct deposit for whatever amount you set.
$250 a month for 36 months will net you $9000 over 3 years, not including compound interest. That's enough to get a pretty decent (although maybe not your favorite) used car. $250 a month is also a pretty small outlay. I know, for some that's a lot of money, but it will be worth it in the long run.
Maybe you can put more away? Let's see how much different amounts will net you over certain amounts of time.
I use 3 years as a denotation of the shortest car loan and 4 years to simulate a college student just starting college, and (hopefully) getting out in 4 years.
These are the amounts, not including interest, for 3 and 4 years.
Not bad. $300 a month gets you in the economy car and better used vehicle range, while $500 a month gets you close to the mid-size and smaller sedans.
3% interest compounded monthly on $500 a month is over $1000, which is better than 5% of the principle. That's not bad. Having extra money to put in the account when you open it will give you more interest on the back end as well.
I don't know how many college students can save $1000 a month, but the figures are there. If you have a campus job, skimp on your expenses and sock away all your extra cash, you can reward yourself at graduation with a brand new, completely owned car.
With some careful planning and saving, you can get a great new car without breaking your bank account or getting caught in long term financing.
The best time to start saving for a new car is when you've just bought one. Most new cars are traded in after 3-6 years. This is the time you should be saving for the next one.
If you don't have a car, but want one, you need to start saving up in order to have the funds available by a set date. You should plan to save for at least 3 years. This sounds like a long time, but if you're in college, driving your first beater, this is the perfect time to start so you can graduate with a brand new set of wheels.
How Much Should I Save?
You need to start saving so much a month. How much? That's up to you, but lets crunch some numbers.
If you save $250 a month and put it in an interest bearing account (I recommend ING Direct which currently offers 3% which is typically better than you'll get at your bank). Open an account and set your direct deposit for whatever amount you set.
$250 a month for 36 months will net you $9000 over 3 years, not including compound interest. That's enough to get a pretty decent (although maybe not your favorite) used car. $250 a month is also a pretty small outlay. I know, for some that's a lot of money, but it will be worth it in the long run.
Maybe you can put more away? Let's see how much different amounts will net you over certain amounts of time.
I use 3 years as a denotation of the shortest car loan and 4 years to simulate a college student just starting college, and (hopefully) getting out in 4 years.
Deposit
36 Months $$
48 Months $$
250
9000
12000
300
10800
14400
500
18000
24000
600
21600
28800
750
27000
36000
1000
36000
48000
These are the amounts, not including interest, for 3 and 4 years.
Not bad. $300 a month gets you in the economy car and better used vehicle range, while $500 a month gets you close to the mid-size and smaller sedans.
3% interest compounded monthly on $500 a month is over $1000, which is better than 5% of the principle. That's not bad. Having extra money to put in the account when you open it will give you more interest on the back end as well.
I don't know how many college students can save $1000 a month, but the figures are there. If you have a campus job, skimp on your expenses and sock away all your extra cash, you can reward yourself at graduation with a brand new, completely owned car.
Money's Tight - How Can I Save More?
Money's always tight, but if you want something bad enough, you may want to give some things up, like...
This is just a small list of places you could cut corners. Habits like drinking and smoking cost a lot to maintain - maybe now's a good time to cut down or quit.
Dates are expensive, so give the dinners, movies, clubs and parties a rest.
Travel is expensive. Cut down on travel, find trips closer to home, buy better deals or take day trips.
If you're a clotheshorse, you could probably cut back. Find better deals or buy less clothes and shoes.
Consider buying groceries in bulk or clipping coupons and taking advantage of other bargains.
You can probably think of other places you can cut corners to save money. When you do save that money, actively set it aside for your car, so it doesn't get spent on something else. Mark it in your checkbook, or keep tabs of your account so you don't think that money is available to spend.
No one is saying you should become a pauper to buy your next car, but there's always somewhere you can save. That money should be going into savings, retirement or other funds anyway, so why not your next car?
Cigarettes Pack/Day
$120-150 per month
Movies for Two 4/Month
$80-120 per month
Dinner for Two 4/Month
$160-400 per month
New Shoes 2/Month
$60-200 per month
Vacations 1/Year
$120-1200 avg per month
Groceries 1/Week
$40-$80 per month
This is just a small list of places you could cut corners. Habits like drinking and smoking cost a lot to maintain - maybe now's a good time to cut down or quit.
Dates are expensive, so give the dinners, movies, clubs and parties a rest.
Travel is expensive. Cut down on travel, find trips closer to home, buy better deals or take day trips.
If you're a clotheshorse, you could probably cut back. Find better deals or buy less clothes and shoes.
Consider buying groceries in bulk or clipping coupons and taking advantage of other bargains.
You can probably think of other places you can cut corners to save money. When you do save that money, actively set it aside for your car, so it doesn't get spent on something else. Mark it in your checkbook, or keep tabs of your account so you don't think that money is available to spend.
No one is saying you should become a pauper to buy your next car, but there's always somewhere you can save. That money should be going into savings, retirement or other funds anyway, so why not your next car?
Okay, So I Have The Money - What About The Dealership?
Even if you have the cash, you still have to deal with the dealership. This is daunting for a lot of people, and there is a simple solution.
Having cash in hand makes the entire process easy, but you still have to negotiate. There are tons of resources for this, which I will someday list, but the best resource I can think of nearly bypasses the dealership altogether, and still gives you all of the information you need to make a deal:
Edmunds.com
This site is great! With it you can find the car you like in your price range, add features, get research on them and do everything but buy it.
That problem is solved when you enter your zip code at the end of the car construction widget and submit your ideal car to the system. Edmunds sends your request to car dealerships in the area and they email you back with a suggested price.
This is advantageous for several reasons. The reply usually comes from personnel in the fleet department of the dealership. They perform private deals with companies and the like. When you work with Fleet, you'll be working with one skilled salesperson, away from the sharks on the rail and the high-pressure sales managers.
The price you receive will also be competitive, because the Fleet manager knows you're getting other quotes through Edmunds and if you don't like their quote, you'll go somewhere else.
Also, since you are requesting certain features, they will order a car with just those features if there isn't one on the lot. You would be asked to come in and test drive a similar model (which you should do anyway before buying any car). If you like it, you can order the car or buy the one you test drove. If you have cash in hand, there's no credit check, less waiting and you may be in a position to negotiate the already better price down further.
Working with Fleet is a win-win scenario for you, and it reduces time, frustration and agony. If you end up not taking the deal there, you can always contact another dealership on the Edmunds list and check out their offer.
Many people are discovering this on the Internet and more and more people are using services like Edmunds and others.
DO - Take your price offers with you to the meeting. You might be able to show a lower offer and get a better deal.
DON'T - Take your price offers to the regular salesman at the rail. They won't be able to affect those prices and you'll just be wasting their time and yours. They would direct you to Fleet, but you should set up that appointment before hand.
Having cash in hand makes the entire process easy, but you still have to negotiate. There are tons of resources for this, which I will someday list, but the best resource I can think of nearly bypasses the dealership altogether, and still gives you all of the information you need to make a deal:
Edmunds.com
This site is great! With it you can find the car you like in your price range, add features, get research on them and do everything but buy it.
That problem is solved when you enter your zip code at the end of the car construction widget and submit your ideal car to the system. Edmunds sends your request to car dealerships in the area and they email you back with a suggested price.
This is advantageous for several reasons. The reply usually comes from personnel in the fleet department of the dealership. They perform private deals with companies and the like. When you work with Fleet, you'll be working with one skilled salesperson, away from the sharks on the rail and the high-pressure sales managers.
The price you receive will also be competitive, because the Fleet manager knows you're getting other quotes through Edmunds and if you don't like their quote, you'll go somewhere else.
Also, since you are requesting certain features, they will order a car with just those features if there isn't one on the lot. You would be asked to come in and test drive a similar model (which you should do anyway before buying any car). If you like it, you can order the car or buy the one you test drove. If you have cash in hand, there's no credit check, less waiting and you may be in a position to negotiate the already better price down further.
Working with Fleet is a win-win scenario for you, and it reduces time, frustration and agony. If you end up not taking the deal there, you can always contact another dealership on the Edmunds list and check out their offer.
Many people are discovering this on the Internet and more and more people are using services like Edmunds and others.
DO - Take your price offers with you to the meeting. You might be able to show a lower offer and get a better deal.
DON'T - Take your price offers to the regular salesman at the rail. They won't be able to affect those prices and you'll just be wasting their time and yours. They would direct you to Fleet, but you should set up that appointment before hand.
Buying Used Cars
Generally, unless you need a short term beater, enjoy being cheap, and/or are a mechanic/good at your own car repairs (and enjoy doing it), then you should always buy a new car.
New cars come with a warranty (which the dealership will bend over backwards to help you with), are usually problem-free, have no previous scary owners and smell nice to boot.
Used cars however can save you money and if you know what you're doing, can be just as valuable in the long run.
Your first concern with a used car is its condition. Since it's used, it could have been owned by a little old lady or car lover, or, more likely, has been driven hard and put away wet.
You should always buy from a reputable dealership. You may get a better deal from a private seller, but there are a lot more variables that might make it a hassle.
Inquire about damage reports and previous owners of the used vehicles. CARFAX makes this easy, and dealerships have to present them at no cost to you.
Many, if not most, used vehicles on a sales lot are Program Cars, which means they were owned or leased by car rental companies and have all been driven *at least* as roughly as you would drive a rented car.
They can easily be identified because they are usually only a year or so old, look great and are within 5-10k miles of having their warranty's run out. This can be an issue when you buy them. You would receive the balance of the warranty and the dealership will most likely try to sell you an extended warranty after the factory warranty runs out. Try to get them to throw this in, especially if you're paying cash.
All used vehicles should be inspected before purchase. Many used (often called preowned, la-de-da) vehicles have inspection reports performed by their mechanics. Each place seems to pride themselves on having more points on their inspection than the next guy, but they seem to do a fairly thorough job.
Even so, when you are ready for a test drive, you should call your mechanic (whoever you usually take your car to) and ask if you can squeeze in by about the time it would take to drive there. Make sure it's somewhere relatively close to the dealership.
Make sure it's ok with salesman/manager/fleet manager to take the car to your mechanic. The salesperson won't complain because he can sit and yak while the car's being checked out.
Go on your test drive, get it up to speed, turn, play with the features, hit the freeway, etc, and then go to your mechanic. A good checkup shouldn't take long and he can confirm the good bill of health or make some suggestions for repairs if necessary.
Drive back to the dealership and make a deal if you still want the car.
A lot of people feel pressured after the test drive.
Don't be afraid to say, "No, this isn't what I want, and since this is what I came for, I'm done". Walk away whenever you feel like. It's a car dealership, not a prison.
New Car/Used Car Comparison
If you are looking at new cars, but the price gets out of control, consider asking for something similar in a used car.
Oftentimes, the dealership has the same model used, which is a couple years older, probably older program cars, or trade-ins as people bring back one model year for an update.
Compare the price of the new and used version, test drive and examine (see above) and make a deal. Dealerships set their used car prices REALLY HIGH. Remind them that they've been driven off the lot, so they should be comparably cheaper compared to a new version (take features into account). Remind them that you are paying in cash, if you are.
Cash makes all deals better and allows you to negotiate the price of the car, NOT the terms of the financing.
New cars come with a warranty (which the dealership will bend over backwards to help you with), are usually problem-free, have no previous scary owners and smell nice to boot.
Used cars however can save you money and if you know what you're doing, can be just as valuable in the long run.
Your first concern with a used car is its condition. Since it's used, it could have been owned by a little old lady or car lover, or, more likely, has been driven hard and put away wet.
You should always buy from a reputable dealership. You may get a better deal from a private seller, but there are a lot more variables that might make it a hassle.
Inquire about damage reports and previous owners of the used vehicles. CARFAX makes this easy, and dealerships have to present them at no cost to you.
Many, if not most, used vehicles on a sales lot are Program Cars, which means they were owned or leased by car rental companies and have all been driven *at least* as roughly as you would drive a rented car.
They can easily be identified because they are usually only a year or so old, look great and are within 5-10k miles of having their warranty's run out. This can be an issue when you buy them. You would receive the balance of the warranty and the dealership will most likely try to sell you an extended warranty after the factory warranty runs out. Try to get them to throw this in, especially if you're paying cash.
All used vehicles should be inspected before purchase. Many used (often called preowned, la-de-da) vehicles have inspection reports performed by their mechanics. Each place seems to pride themselves on having more points on their inspection than the next guy, but they seem to do a fairly thorough job.
Even so, when you are ready for a test drive, you should call your mechanic (whoever you usually take your car to) and ask if you can squeeze in by about the time it would take to drive there. Make sure it's somewhere relatively close to the dealership.
Make sure it's ok with salesman/manager/fleet manager to take the car to your mechanic. The salesperson won't complain because he can sit and yak while the car's being checked out.
Go on your test drive, get it up to speed, turn, play with the features, hit the freeway, etc, and then go to your mechanic. A good checkup shouldn't take long and he can confirm the good bill of health or make some suggestions for repairs if necessary.
Drive back to the dealership and make a deal if you still want the car.
A lot of people feel pressured after the test drive.
Don't be afraid to say, "No, this isn't what I want, and since this is what I came for, I'm done". Walk away whenever you feel like. It's a car dealership, not a prison.
New Car/Used Car Comparison
If you are looking at new cars, but the price gets out of control, consider asking for something similar in a used car.
Oftentimes, the dealership has the same model used, which is a couple years older, probably older program cars, or trade-ins as people bring back one model year for an update.
Compare the price of the new and used version, test drive and examine (see above) and make a deal. Dealerships set their used car prices REALLY HIGH. Remind them that they've been driven off the lot, so they should be comparably cheaper compared to a new version (take features into account). Remind them that you are paying in cash, if you are.
Cash makes all deals better and allows you to negotiate the price of the car, NOT the terms of the financing.
Good Luck Buying Your Next Car and Tell Me How I Went!
Please leave feedback about your saving and buying experience.
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Good luck!
JHFSEO wrote...
in reply to SarfarazKhan
I like the idea of car donations. You get more out of the transaction than you would if you trade in a car, and you get to help people out. Everyone wins, except for the dealers, which is ok.
Posted November 30, 2008
SarfarazKhan wrote...
Hi,
This is a great posting to know about How to Buy a New or Used Car - A Guide to Budgeting and Saving for your Next Car. You can get also more information about Car Donations are eligible for fair market value tax deductions under the new tax laws when donated to programs such as that offered by United Society. Car Donations To Charity at United Society "Motor Vehicle Donations Program".
I am so impress with your posting and waiting for next.
Thanks.
Sarfaraz Khan
Posted October 27, 2008
usedcarauction wrote...
Really it is great stuff to car buyers either may be new car or used car.The author had written a great stuff about selling and buying the car.
http://www.squidoo.com/usedcarsdealer
Posted September 29, 2008
