:: The Money Guide for Young Investors ::


	BUYING A CAR

	Things to Consider *Hidden Expenses* The cost of owning a car is much more than the monthly payment. You should also consider: The cost of auto insurance premiums Routine maintenance expenses such as new tires and oil changes Repair costs The cost of filling up your tank Even if you buy a new car, some repair costs will not be covered under the warranty. For example, brake repairs are not normally covered by the manufacturer’s warranty. Depreciation is one of the hidden costs of buying a car. The minute you drive a new car off the dealer’s lot, it depreciates in value. Every mile you drive causes it to depreciate. Depreciation is an important factor to consider as you choose between a new car and a used car. *New or Used?* The look and smell of a new car are tough combination to beat. New cars are typically free of problems and are covered by a manufacturer’s warranty. The down side is the high initial cost and the fact that the bulk of a car’s depreciation takes place in the first few years. Generally, a new car depreciates about 30 percent in value after one year. There are also certified pre-owned vehicles that undergo a rigorous inspection before being resold to the public. Although you will pay a premium for a certified pre-owned vehicle, the warranty is likely to be longer than the one offered by most used car dealers. Extended warranties are usually a bad deal for customers. They are expensive and may not cover certain types of car repairs. Although your monthly payment will be lower with a used car, you must allow more room in your budget for repairs. Fear of the unknown keeps many people from buying a used car. You may not know if the car was involved in an accident or sustained weather-related damage. Here are some ways to avoid those problems: Buy your used car from someone you know and trust. If you purchase the car from a private owner, ask to see the vehicle’s maintenance records. Have the used car inspected by your own mechanic. Purchase a vehicle history report through Autocheck.com or Carfax.com. Car Loans Buying a car can be a confusing process. You may be offered low-interest financing as an incentive to buy a car. In exchange for this low-interest financing, you may wind up paying more for the car. If the dealer gives you the choice of better discount on a car or a lower interest rate, compare the monthly payments between those two options. You should also compare the dealer’s financing terms with those offered by a bank or credit union. Car loans might be as long as ten years. The longer the loan, the more interest you pay. You may also find yourself with an aging vehicle that needs repairs and years left to pay on your car loan. Find out how the interest on your car loan is calculated. The formula may cause you to pay much more interest in the early years of the loan. In addition, watch out for pre-payment penalties if you pay the loan off early. Tips & Common Mistakes *Common mistake: High car payments* If your car payment is extremely high, you’re diverting money from your other goals. Here’s how it affects your financial situation: You have less money to pay off student loans or your credit cards. You’re likely to pay higher insurance premiums on a more expensive car. You have less money to invest or to pursue other goals, such as buying a home. Even if you get a high-paying job, your paycheck only goes so far. You need to set priorities and decide how much of your budget should go toward a car payment. When you go car shopping, watch out for high-pressure sales tactics. If the salesperson pushes too hard, you may want to go elsewhere to buy your car. *Common mistake: Paying too much* Don’t assume “dealer prep” charges are a standard charge at all dealerships. This is an extra charge that some dealers tack on to the cost of the car. The dealer may give you more than your trade-in is worth, but will charge you more for your new car. If possible, sell the car you drive now on your own, so you’ll know exactly what you’re paying for your new set of wheels. *Tip: Research the dealer* Check out the Better Business Bureau, the Internet, and other sources for information on the dealer’s reputation for doing right by its customers. In addition to friends, relatives, and fellow students, ask around town for opinions on which dealership provides good deals and service. *Tip: Renting a car* When you go on a long trip, the cost of gas isn’t your only expense. Your car depreciates further with each mile you drive. You may find that if you consider depreciation, it’s actually less expensive to rent a car with unlimited mileage. Getting Started Even though it’s possible to buy a car online, you will probably need to go to the showroom to test drive the car and make your best deal. Before you go, here are the steps you should take: Do your homework. You should check Web sites like Kbb.com (Kelley Blue Book), Edmunds.com, and Cars.com to find out the dealer’s cost, plus a fair profit. You should also cruise the Internet for ratings, prices, and reviews. Consumer Reports is still one of the best sources of information. Research your credit rating. Shop around for a car loan before you go to the dealer. The fabulous rates they’re quoting in advertisements may not apply to you. Dealer financing isn’t necessarily the best bargain. Check out the safety records of makes and models you are considering. Check out the car’s warranty. Ask your insurance carrier about which makes and models are the least expensive to insure. Figure how much payment you can afford without undermining your financial situation. Research the dealer’s cost on the Internet and the value of your trade-in. Investigate the fuel economy and reliability records of the cars you’re considering. When you’re ready to buy, make sure you shop around for the best price. FAQs *How do I negotiate the best deal on a car?* To negotiate your best deal, there are a number of strategies you can utilize: After you determine which make and model you want to buy, take it for a test drive. Decide which accessories you really need and those you can live without. Visit several dealers to compare prices on the same make and model with similar equipment. Stay organized. As you shop around for the best price on the make and model you want, you need to keep thorough notes on what terms each dealer is offering. Be patient. Don’t snap up the dealer’s first or even third offer. You shouldn’t be afraid to leave if you’re not getting the terms and price you want. Know what features and options are important to you. Extras drive the price of a car up, so only pay for those features you want and need. Extended warranties aren’t necessarily a good deal and may not cover the mechanical problems that are likely to occur. Make sure you know what promotions you’re entitled to, such as those offered to first-time car buyers of a particular make and model. The car manufacturer also gives incentives to dealers. Visit the car manufacturer’s website, or KKB.com (Kelly Blue Book), for promotions. Negotiate the price of your new car, trade-in and financing separately. *Should I buy or lease a car?* There are different schools of thought on leasing. Advocates of leasing say this: You drive a nicer car for a lower monthly payment than if you bought a cheaper make and model. You don’t have to worry about a trade-in when your lease ends. You always drive a newer car and can trade automobiles every few years. You’re not buying a depreciating asset. Advocates of leasing argue it’s the right choice, especially if you don’t drive many miles per year. When you lease a car, you may still owe: Money due at signing Refundable security deposit Acquisition fees Disposition fees Insurance, maintenance and repairs Excess wear and tear If you go over the allotted mileage, you’ll pay a steep charge. For example, you may pay 20 cents for each mile over and above 10,500 miles per year. A number of financial experts believe that you’re better off buying a car rather than leasing, especially if you plan to keep the vehicle for a long time. They contend that leasing enables you to drive a car you really can’t afford. You also owe sizable penalties if you need to terminate a lease before it ends.