ABC News is reporting that more consumers are having trouble making their car payments.
This doesn’t surprise me. It seems like more and more people think it is perfectly okay to live beyond their means. They can’t afford their homes… why should they be able to afford their cars? And car dealers anxious to make a quick sale in a lousy economy are willing to look the other way, or even pad people’s incomes on the loan applications to sell the vehicles.
The problem with buying a new car is that as soon as you’ve bought it and drive it off the lot, it has lost 15 to 20 percent of its value. That means that you start out with a loan and almost immediately become upside down in it (meaning you owe more than its worth). If you have to sell the vehicle, or it gets totalled in an accident, you can end up in a heap of trouble fast.
So what can you do when you need to purchase a car?
Your best option is to buy a vehicle with cash. This requires a lot of self-discipline to save. You can use your income tax refund to start your car fund, and then put away the equivalent of a car payment each month. Author Mary Hunt outlines a car-buying process in her book, “Live Your Life for Half the Price.” She recommends that you buy the best vehicle you can afford with cash. Continue to save a car payment each month. In a couple of years, use the money from your savings and your current vehicle to trade up for a slightly newer, nicer vehicle. Keep doing this process and in just a few years, you’ll be paying for an almost new vehicle with cash.
Never buy a brand new vehicle. I find the best deals are often program rental returns – vehicles that are only one or two years old with under 25,000 miles on them. You can usually get a good deal on them, and they don’t depreciate as quickly as a brand new vehicle does. They also have some of the bugs worked out of them by the previous owner. If you don’t know much about vehicles, take a friend with you who does. And do your homework. Check out reliability reports from Consumer Reports’ Auto Buying Guide (get it from the library), and talk to everyone you know about their vehicles.
If you must take out an auto loan, be sure to know the terms. Never take out more than a three-year car loan. With cars only lasting 8-10 years, you don’t want to get stuck having major vehicle repairs and a car payment at the same time.
Do the math. Sometimes a no-interest or low-interest loan isn’t as good of a deal as cash back. Almost every major auto dealer has a calculator on their website that can help you figure out the total price. Bankrate also has some calculators to help you estimate your payment.
Don’t let the salespeople talk to you about monthly payments. You should be more concerned about the bottom line price. Your goal is to get that final price as low as possible. If a salesperson offers you a great, low monthly payment, you can bet that the length of your loan is quite long.
I personally opt to purchase an extended warranty. Some people will tell you that you are better off to save the money for a catastrophic repair than to overpay for an extended warranty. I find that few people have the discipline it takes to save for that kind of event. All it takes is for your transmission to fail (which happened to us) for the warranty to pay for itself.
Shop around. Know what the bottom line price is. If a dealer won’t “deal” with you, walk away. They need you more than you need them.
And a final tip: Be sure to investigate the cost to operate your vehicle. What kind of maintenance/repairs will it need? What kind of gas mileage does it get? Check with your insurance company to find out how much your new ride will cost to insure.