How much cash do you have? That should be your first question. If you have not planned for your car purchase months in advance, then you might want to step back and do more preparation. Get away from the monthly payment mentality. If you do end up buying a vehicle from a dealer and a loan will be used, NEVER tell that salesperson what you can afford to pay each month. Keep that your secret no matter how many times they try to pull it out of you. Focus on how much you are spending and how much debt you are possibly going to take on and then think twice.
Do not just show up at a car lot and “look around.” Those salesmen are very good at what they do. They will convince you that they are looking out for you, and they can certainly get you in a car, TODAY. They are professionals at getting you in that car as soon as possible. Do your research and preparation long before heading to the car lot via the internet to include YouTube. Most of what you need to know is right there. Go to the car lot only when you are ready to test drive a vehicle and possibly buy it with the information you have obtained long before showing up.
Pay cash for your cars when possible. If you think that only applies to “rich people”, you’re wrong. Whether you make $20,000 a year or $200,000 a year, this advice applies to all. Are there times where assuming a low interest rate loan is better than paying cash? Yes, if you take that cash and pay extra on high interest rate debt and/or invest it wisely in no-load index stock mutual funds. This is called opportunity cost. Learn more on this issue here. Be careful with this concept, though. It can lead to taking on more debt than you should in some cases.
If you do not have the cash to pay for a car and you really need a vehicle, go down to your local credit union (interest rate will usually be lower than a bank) and have them provide you an amount they are willing to loan you based on your income and overall financial situation. BIG POINT: Just because the institution says you can borrow $30,000, does not mean you should! Borrow what you are comfortable with, based on the total debt you are assuming, the monthly payment, the interest rate, and how long it will take to pay the loan off.
New cars are detrimental to wealth creation. Don’t let anyone convince you otherwise. Just try to get ripped off less! So how do you do that? You buy an older car. Let’s take a look at a $30,000 vehicle. After three years, you will lose around $10,000 or so on that vehicle in depreciation. This amount does not even account for the insurance on your new vehicle, the interest on your loan, and the sales tax and license fees of the high-dollar vehicle. Identify the kind of vehicle that you want to buy. Buying a car that is at least two years old, and preferably three, will reduce the effects of depreciation on a vehicle dramatically. Depreciation is what makes cars wealth-depleting assets.
Go to kellybluebook.com or Edmunds.com, and research the vehicle you are interested in. It is important that you learn to understand the difference between trade-in, private party, and suggest retail value. These all mean something different and there is a great deal of money at stake. Learn more on the issue and the differences by going here. Inform yourself, there is a great deal of money at stake. Prepare a savings plan to buy that vehicle. This should be part of your financial plan, as you write down your goals. Figure out the total amount needed and when you want to buy it. Set aside a monthly savings amount that will help you reach your goal.
Consider the ongoing costs of any vehicle you buy and how much it will cost you over the length of time you own it. Basically, don’t be cheap upfront and then end up paying a bunch of money over time, because you purchased a vehicle that requires a great deal of maintenance. The goal is to get the best value when plunking down a chunk of money for a vehicle. You want a vehicle that you can drive for a good length of time (at least 10 years) with minimal yearly costs. That usually requires spending at least $10,000 or so upfront.
Do your research to identify this information BEFORE buying and before speaking to someone who wants to sell you a vehicle. Make every attempt to buy from a private party when possible. You will almost always get a better deal with an amateur than a professional. There is no way a dealership can compete in price with a private party. The dealership marks up the cost of their vehicle to cover their costs and profits. A private person can easily sell the same vehicle for less money and still make a profit. Just be careful and keep reading.
Take the vehicle for a test drive. Open up everything, turn everything on, and write down every single thing you see that is wrong with it (this will be used in your negotiating worksheet). Consider taking the drive when it is raining and/or on a rough road. Both conditions will highlight any possible issues that ideal conditions may not provide you.
Take the vehicle to a trusted mechanic. Pay them to check out the car very carefully and tell you what is going to go wrong or is wrong with the vehicle in its present state (include all problems on your worksheet). This should take a bit of time so the car expert can thoroughly inspect all aspects of the car. Do not do this yourself unless you are a very good mechanic.
Have the history of the car checked. You can do this at carfax.com or auotocheck.com. These sites will provide you with the reported history on most vehicles in most situations. Be aware that not everything is reported. Do not take these reports as 100% proof, but they should be considered as a viable part of the process to avoid buying some vehicle that has been in a big crash, in a flood, etc.
Add up the problems on a negotiating worksheet, and subtract the cost of fixing them from your asking price. Simply subtract from the value you have already identified on the car buying sites. Now you know what that vehicle is worth (relatively so, this is not a perfect science). Next, and this is very important, have the owner of the vehicle start the process of negotiation. Have them start the process, and then you negotiate from there as you both try to get the best deal you can.
As you negotiate, keep your bottom line number a secret from the other person. If you end up buying the vehicle from a dealer, keep saying NO when they want to add on the extra “stuff.” Here, I am talking about extended warranties, scotch guard protection, etc. Most of these add ons are a waste of your money (the salesperson gets some nice commissions from these low value items). Be firm! The salesperson will most likely try to scare you into buying these unneeded extras.
Be willing to walk at any point in the process. Provide the party with a fair price, negotiate as needed, but do not fall in love with that vehicle. If necessary, have a spouse or a friend there to pull you aside and remind you that sleeping on matters can always clear the mind and avoid an impulse purchase. Don’t try to screw someone. Do your homework and be honest and fair with the other party. Look for a win-win situation. Both parties can come away feeling good about the transaction.
P.S. You are at a big disadvantage with the dealer and it is important to acknowledge this key point. They do this stuff everyday and that means they are experts with not only selling vehicles, but human behavior in many cases. You and I are amateurs who go through this process every once in a while. They do it everyday and they work with others who have been doing this for years and sometimes decades. Don’t think for a minute you are going to pull one over on a car dealer. You will not!
Detach your self-image from the automobile. This is probably the most important point on this long recommended list. The car/truck is just a heap of metal that helps you to travel from Point A to Point B. Find a vehicle that serves your needs and take that extra money that you would have spent on an expensive vehicle and use it on your emergency account, retirement funds, or college education for your children. Good luck!