Car Buying

Car buying can be extremely stressful. Why? Because it’s not something that you do often and you don’t feel that you know enough about the car buying process or what you’re getting into. Read below to learn more about car buying and improve your chances of making your next car buying experience a good one.
 
Download the Buying a Car Handout.

Before rushing out and hopping right into the car buying process, it might be smart to first ask yourself why you think you need to buy a new car right now. Try asking yourself the following questions about your current car to help determine if you definitely need to buy a new one now, or if it’s something that can wait.
  • Is it dangerous to drive?
  • Is it too small for my needs?
  • Is it not dependable enough for the long distances I drive?
  • Is it not presentable enough for work?
  • Is it just not pretty enough to let the rest of the world know how awesome I am? 
If you can’t come up with a good reason for needing a new car right now, consider putting it off and save your money instead until you do need a new car. This will help minimize the car loan you take out when you finally do purchase a new car.  
Extreme car depreciation within the first few years of a new car’s life is another reason to postpone trading in your current car for a new car. According to Edmunds.com, new cars can lose as much as 40% of their value in the first 3 years of their life and up to 60% of their value in the first 5 years of their life.

So, if you buy a new car today and then turn around and sell it within the first few years, you’ll very likely be Upside Down on your car when you do it (you’ll owe more on the car loan than you’ll get for the car when you sell it) and will lose money in the process. If at all possible, try to hold onto your car for at least 3-5 years so that you can pay down your car loan and the depreciation curve on your car’s value can level out before you sell it.

So, you think you need (or just really, really, really want) a new car, but you don’t know what car price you can afford to pay. Below are some steps for figuring that out.

Determine Your Monthly Car Allowance 

Your Monthly Car Allowance is how much of your monthly income you have left over each month which could be used to pay for the monthly new car expenses. To determine this figure, you’ll need to breakdown and compare your monthly income and expenses. Below is an example breakdown. 
 

Monthly Income Monthly Expenses Monthly Car Allowance
Jobs $600 Rent $450  
Parents $500 Utilities $50  
Financial Aid $900 Telephone $40  
Scholarships $100 Food $120  
Miscellaneous $50 Entertainment $100  
    Tuition & Fees $750  
    Books $150  
    Computer $40  
    Miscellaneous $50  
         
  $2,150   $1,750 $400


If the above example were true, then you would have $400 in a Monthly Car Allowance to pay for all of your monthly car expenses associated with your new car. 

Determine How Much of a Monthly Car Payment You Can Afford 

Buying a new car almost always leads to new or increased monthly car expenses. Below are some monthly car expenses which are subject to change:

  • Car payment
  • Gas
  • Car insurance
  • Car maintenance 

First, estimate what the following monthly expenses will be for your new car:

  • Gas - Compare the gas mileage on your current car against the gas mileage of the new car that you’re considering buying. Use this information to estimate what your monthly gas expenses will become for your new car.  
  • Car Insurance – Contact your insurance agent and ask for an estimated monthly car insurance payment based upon the new car you’re considering buying.
  • Car Maintenance – Monthly maintenance costs will very likely decrease if you buy a new car because new cars typically come with Warranties which protect you from having to pay the cost of car defects and malfunctions until the car reaches a specified mileage or number of years old. 

Second, subtract the estimated cost of gas, car insurance, and car maintenance for the new car you’re considering buying from your Monthly Car Allowance to determine the maximum amount of money you have left in your Monthly Car Allowance to put towards a monthly car payment.
 
Below is an example breakdown which shows how to calculate the maximum amount of money you have left in your Monthly Car Allowance to put towards a monthly car payment.

Monthly Income Monthly Expenses Monthly Car Allowance
Jobs $600 Rent $450  
Parents $500 Utilities $50  
Financial Aid $900 Telephone $40  
Scholarships $100 Food $120  
Miscellaneous $50 Entertainment $100  
    Tuition & Fees $750  
    Books $150  
    Computer $40  
    Miscellaneous $50  
         
  $2,150   $1,750 $400
         
    Est. Gas $70  
    Est. Car Insurance $100  
    Est. Car Maintenance $15  
         
      $185  
         
    Max Car Payment $215  


If the above example were true, then you would have a maximum of $215 left in your Monthly Car Allowance to pay towards your new car payment each month.
 
Find Out What Sticker Price You Can Afford 

Now that you have an idea of the maximum amount of money you can spend each month on your new car payment, you can use it to get an idea of what Sticker Price you can afford. This is the price listed on the sticker attached to the new car window at the dealership and it is also known as the Manufacturer’s Suggested Retail Price (MSRP).
 
Go to Edmunds.com's What Can I Afford Calculator and input the requested information. Below are a few helpful tips regarding filling out the information for this calculator.

  • Enter the maximum monthly car payment you calculated in Step 2 as “Your Target Monthly Payment”.
  • You can select whatever “Loan Term” you prefer, but remember that the longer the loan is, the more interest will accrue.
  • Bankrate.com’s Compare Auto Rates page can help you to determine what would be a reasonable “Market Finance Rate” to enter. 

The calculator will then tell you what “Sticker Price Range” you can afford based upon the information that you entered. If the sticker price range falls below the cost of the car you’re considering buying, then you should possibly consider purchasing a less expensive car or waiting to purchase the car you want until after you’ve saved up more money.

A Few Other Things to Consider:

  • Down Payment (a payment made upfront towards the cost of the car) can be required when you buy a new car, and in such a case, savings are essential. This requirement may be waived by the dealership altogether though.
  • Income is typically what you’ll use to make your monthly car payments, but in the event that you stop earning income, an Emergency Fund (money set aside for a rainy day) can allow you to keep making car payments until you can either start making income again or sell your car before it’s Repossessed (retaken for nonpayment of the car loan). 
Before spending too much time looking at new cars, it’s important to sit down and write out what your actual car needs and car wants are. These are two very different things and it’s very easy to change your wants into needs by becoming too emotionally wrapped up in buying a car (especially after spending a lot of time looking at it and test driving it). Figure out your car needs and wants BEFORE you fall in love with any one particular car.
 
Below are a few questions to ask yourself which might help you to separate your wants from your needs:
  • Where will you most likely be driving and parking in the next 5 years? Will there frequently be size restrictions in the places that you’ll be parking? If so, a smaller car might be best.
  • Will you be driving around children or loads of stuff frequently? If so, a larger car might be best.
  • Can you drive a stick shift (manual transmission) vehicle? If so, it might save you quite a bit of money to buy a car without automatic transmission. Remember though that you’ll need to have other people (spouse, friends, family, etc.) who can also a drive stick shift, otherwise you could find yourself in a bad situation in the event of an emergency and can’t drive yourself.
  • Do you typically drive alone or will you be driving around often with other people? If other people, especially work associates or clients, will be riding in your car frequently, then it might be worthwhile to get a nicer car that also isn’t uncomfortably small. 
Everyone knows what buying a car means, but often people aren’t certain what Leasing is. Leasing is essentially renting a car under contract for a specified number of months.  Deciding on whether to buy or lease a car really comes down to your financial situation and personal preferences, but below are a few pros and cons to both which might help you decide which one to pick.
 
Buying a Car – Pros
 
Often Cheaper Beyond 3 Years – Depreciation on a new car typically slows down and levels out after it’s about 3 years old and as a result, buying a car and holding onto it for more than 3 years could be cheaper than continuously leasing a car for a much longer period of time.
 
Money Can Be Saved After the Car is Paid Off – Car loans typically last 3-6 years. After paying off your car, you could take the money that you would typically apply each month towards your car payment and instead sock it away and start saving for that awesome jet ski you’ve wanted ever since you were a kid and your mom said you couldn’t have one….of course the ME Center officially recommends that you use that money instead to pay off your student loans.
 
Car Ownership – If you buy the car, then it’s your car and you can do anything (legally) that you want with it. If your friend dents your hood while sliding across it like the Dukes of Hazzard, as its owner you get to decide if they need to pay to have it fixed or just buy you a kolache and call it even…kolaches are super delicious, but the ME Center officially recommends that you ask your friend to pay to have the car fixed.
 
Buying a Car - Cons
 
Higher Payments – When you buy a car, you get to keep it, so you’re paying for the entire price of the car plus any associated fees along with car loan interest (assuming you had to take out a car loan to buy the car). As a result, you’ll typically have to make higher monthly car payments when you buy a new car than when you lease a new car.
 
Responsible for Damages – As mentioned above, new cars come with Warranties which cover various parts of the car for a certain number of miles or years. Once your Warranties end though, it’s up to you as the car owner to take care of any new maintenance issues that pop up with the car that you bought. Although car deterioration and other issues often start to come up after a car is 5 years old or has reached 100,000 miles, it really varies by car type.  
 
Leasing a Car - Pros
 
Lower Payments – When you Lease a car, you only get to drive it for a certain period of time and then have to return it to the dealership. As a result, your monthly car payments may be significantly lower than if you’d bought the same car outright. If you choose to Lease a car, you could take the extra money that you’re saving each month and set it aside for one of your financial goals.
 
GAP Insurance – In the event of a wreck, regular car insurance typically only pays the cash value of your car, not the total amount that you would owe the dealership. Luckily, Guaranteed Auto Protection (GAP) Insurance is included in almost all lease contracts and can cover the cost not covered by regular insurance so that you don’t find yourself owing thousands of dollars in the event of an unexpected accident.
 
No/Low Down Payment – Very often, down payment requirements for Leased vehicles are either waived or are lower than for purchased vehicles. If you need a newer, reliable car, but can’t afford to make a down payment, Leasing may be a good option for you.
 
Leasing a Car - Cons
 
Mileage Restrictions – Leased vehicles typically come with mileage restrictions and penalties. For example, your Leased vehicle may be restricted to 10,000 miles per year and have a penalty of $0.20 for every mile over that limit. So, if your Lease is for 4 years and you drive 12,000 miles each year, you would owe $1,600 (2,000 miles per year X 4 years X $0.20) at the end of the Lease. This would be the same as paying an extra $33 per month throughout the 4 year Lease.
 
Early Contract Cancellation Charges – When you Lease a car, you’ve agreed to a contract, and breaking that contract early will likely cost you in charges. For instance, your dealership might require you to pay all of the remaining payments on your Lease. Before signing a Lease, make sure that you fully understand the additional charges associated with breaking the Lease.
 
Additional Fees – Several one-time fees are charged at the beginning and end of the Lease that you need to be aware of. An Acquisition Fee is essentially a document processing fee which is charged at the beginning of the Lease. A Disposition Fee is a fee which is charged at the end of the Lease which covers the dealership’s cost to dispose of the car. A Purchase-Option Fee is a fee which you can pay at the end of the Lease to purchase the Leased car. Make certain that you understand how much each of these will cost before you sign a Lease. At the end of the Lease, the dealership will also assess the damages of the vehicle and will charge you for the damages which exceed the amount your Lease allowed for.
 
Perpetual Payments – If you only Lease a car and never buy one, then you will end up making payments forever. On the other hand, if you buy a car, pay off your car loan in 5 years, and keep your car for 15 years, you’ll be able to save money for 10 years (maybe enough to buy your next car with cash). Everyone is different and has different needs, but this is something to consider. 
Trying to decide whether to buy a new or used car may be one of the most perplexing decisions of buying a car. Below are some pros and cons for both which might help you decide which one will work best for you.
 
New Car - Pros
 
New Car Smell – It may not be easy to quantify, but the satisfaction we all get out of having a brand new car with clean tires, a steadily purring engine, a sharp look, and a new car smell (rather than the smell of old pop tarts and french-fries) is a benefit to buying a new car which must be taken into account.
 
Warranty – As mentioned previously, Warranties typically come with new cars, but there are different types of Warranties. Bumper to Bumper Warranties cover the entire car with exception of wear items (such as glass, interior trim, seating fabrics, and cabin surfaces), the actual bumpers, and a few other items. Powertrain Warranties typically last longer than Bumper to Bumper Warranties, but only cover the engine, transmission, and other parts related to the car’s propulsion system.
 
Higher Resale Value – Buying a new car and then reselling it after 5 years will more often than not earn you more money than buying a 3 year old car and then reselling it after 5 years (because it is now 8 years old and very likely has more damage, more miles, and a greater likelihood of requiring regular maintenance).
 
New Car - Cons
 
Higher Purchase Price – New cars almost always cost more than used cars. Why? Among other things, it’s because new cars have new features, a new warranty, no damage, and a greater likelihood of going longer before requiring costly maintenance.
 
Higher Insurance Coverage – New cars often come with new safety features which might help to reduce your insurance costs, but at the same time, because they are new cars and will cost more for your insurance company to replace, buying a new car could increase your insurance costs.
 
Significant Depreciation – As stated previously, new cars depreciate significantly within the first 3 to 5 years of their life. They even lose value the moment you drive off of the dealership lot. As a result, buying a new car and then re-selling it within the first 3-5 years can cause you to take a heavy loss if you owe more on your car loan than the car is worth (which is common in those early years of a car’s life).
 
Used Car – Pros
 
Certified Pre-Owned Car Warranties – Some used cars are sold with Certified Pre-Owned (CPO) Car Warranties which are new Warranties for used cars which have been inspected and confirmed to be in good enough shape to warrant a new Warranty. Typically, CPO cars are newer (ex. less than 5 years old) and have not reached a certain number of miles yet (ex. less than 75,000 miles). CPO Warranties can be provided by a manufacturer (which is best) or a dealership such as an independent used car dealership (which may not do its own repairs). Make sure you know who is providing the CPO Warranty.
 
Lower Sales Tax – When you buy a car, new or used, you have to pay sales tax. In Texas, sales tax is 6.25% of the sales price (or the standard presumptive value of the car; whichever is highest). Since used cars typically have a lower sales price than a new car, you typically pay less sales tax as a result.
 
Used Car – Cons
 
Financed at Higher Rates – Interest rates for used car loans are typically higher than for new car loans for several reasons; here are a few.
  • Lenders can better predict the future resale value of a new car than a used car, and this puts them more at risk for a loss on used cars. They make up for this risk by increasing the used car loan’s interest rate.
  • Many automakers own new car lenders and they want you to buy a new car, and so they offer an incentive through reduced interest rates on a new car loans.
  • More often than not, people who buy used cars have lower credit scores than those who buy new cars, resulting in higher used car loan interest rates. 
Higher Maintenance Costs – As cars age and take on more miles, their parts begin to degrade and maintenance becomes required more and more often. So, if you buy a used car that’s 5 years old (rather than a new car), there is a much higher likelihood that you’ll be having to pay for car maintenance sooner than you would have otherwise and that these costs can add up. 
For most people, negotiating a new car’s price is the primary reason they hate the car buying process and they are justified in feeling this way. You as the customer will only have to do this a couple of times in your life, and yet you have to negotiate the new car price with a salesperson who does this on a daily basis and has far more information about the vehicle you want than you ever will. This puts you at an obvious disadvantage from the outset and can make you feel VERY anxious. Understanding basic new car sales price lingo is the first step in preparing yourself for war (aka negotiations). The second step is to understand and separate the 3 negotiations that are typically involved in buying a new car.
New Car Price Terminology You Should Know
Invoice Price – The Invoice Price (also known as the “dealer cost”) is the price that the dealership paid the manufacturer to buy the new car from them and put it on their lot so that they can sell it to you. Knowing this figure can be extremely helpful in bargaining the new car price with the dealership as it gives you an idea of how low the dealership can go and still make a profit. According to Kelley Blue Book, dealers mark up the price of their most high-volume cars by less than 10% on average.
 
Manufacturer’s Suggested Retail Price – As stated before, MSRP is the sticker price and is the retail price suggested by the manufacturer to the dealership. You should never pay MSRP though as dealerships frequently reduce the sales price.
 
Manufacturer’s Incentives - You might be thinking, “Ok, I’ve got a really great idea on how to calculate the profit a dealership would make off of the car I want to buy. I’ll just subtract the Invoice Price from the MSRP to find out the maximum amount of profit they could make.” Due to manufacturer’s incentives, such as Dealer Holdbacks, it’s not that easy to calculate a new car’s net cost to the dealership (and therefore also their maximum net profit from selling the car to you). A Dealer Holdback is created when a manufacturer artificially increases the Invoice Price of the new car (ex. by 3% of MSRP) to the dealership, and then repays the dealership that inflated amount once they sell the car to you, the consumer. Having an artificially higher Invoice Price allows the dealership to market the car’s sales price as a steal since it’s only barely higher than the Invoice Price the dealership paid themselves, but this is not in fact true. Manufacturer incentives also include advertising credits, flooring assistance, floor plan allowance, wholesale credits, and more. All of these incentives help to reduce net cost of the vehicle to the dealership (thereby increasing its overall profit).
 
Rebates – A Rebate is a fixed amount of money (ex. $1,500) which is given to the buyer when they purchase a particular car. Rebates may be provided by the car manufacturer, the car dealer, or by the government (typically for high mileage, low emissions vehicles). Rebates have specific requirements, so make sure that you understand those clearly.
The 3 Negotiations Typically Involved in Buying a New Car

New Car Price 

The first negotiation that you should have with the car salesperson is to establish a new car price that works for you. Until this is done, you should not discuss the trade-in price of your current car or financing options because, as a brilliant teacher and mathematician once said, too many variables would become involved and you’d never know if you were actually getting a good deal. So, one step at a time, starting with agreeing on the new car price. Below are some tips for establishing a good new car price.
  • Some dealerships have monthly and yearly quotas and offer bonuses to their salespersons for meeting those quotas. Consider buying a new car at the end of the month or even at the end of the year as you may have more negotiating power at those times (especially at the end of the year, when some dealerships are trying to sell off their inventory for tax purposes)
  • Let the dealer make the first offer on the new car. Why is this important? Let’s assume that MSRP on the new car is $24,000 and you make the first offer at $22,000. If the salesperson was ever going to agree to a lower dollar amount, they’re not now! Given the same situation, just start out by asking the salesperson how low of an offer they can make from the outset.
  • Once the salesperson makes their first offer, know that it isn’t the lowest that they can go (why would they start off by reducing their commission to the lowest dollar amount possible?), and make a lower counteroffer. Be respectful, but persistent about wanting to pay less than their initial offer.
  • Haggle or have someone haggle for you. Just because you’re buying the car doesn’t mean that you have to be the person to negotiate the price of the new car. Bring your mother, your father, your friend, a Texas A&M lineman, or anyone else who you feel would do a great job fiercely negotiating on your behalf.
  • Ask for the “out the door price”. The price that you ultimately pay for a new car includes the agreed upon sales price, plus tax, title, and license fees. As stated previously, sales tax alone in Texas is 6.25% and so this can really add to the total purchase price of the new car. Make sure you’re really comfortable with the total purchase price before you agree to it. 
Trade-In Price 

Once you’ve established a new car price that works for you, set that negotiation aside and move onto the second negotiation: trade-in price. Below are a few tips which may help you to maximize how much the car dealership will offer you for your trade-in.
  • Find out the approximate value of your trade-in by looking up its True Market Value on Edmunds.com and its Blue Book Value on kbb.com. You’ll have an easier time negotiating the price of your trade-in if you know what its worth.
  • Make certain your trade-in looks sharp (clean, air in the tires, oil changed, etc.) as the salesperson will use everything wrong with your trade-in to bring down its price.
  • If the final trade-in price is too low, you can still buy the new car from the dealership and sell your current car to an independent owner or to another dealership. 
Choosing Financing 

One of the primary ways that dealerships make money is through financing new cars and that’s because car loan interest can really add up over time. After establishing a good trade-in price, you’ll very likely be asked to go back to the finance manager’s office to discuss financing the car. Here are a few things to remember when you do.
  • Interest rates on car loans can vary significantly depending upon who you borrow from and the terms of the loan, so shop around before agreeing to borrow from any particular borrower.
  • In addition to dealerships, banks and credit unions also offer car loans. Before even going to the dealership, make sure to research the different rates that are being offered by banks and credit unions that you are considering lending from.
  • Bankrate.com can provide you with interest rates on car loans from across the nation which will help you to get perspective on what would be a reasonable interest rate for the dealership to offer you.
  • When a dealership offers to lower your monthly payments (in order to help you out….), they may also be increasing the length of your car loan (which in turn increases the interest that you end up paying the dealership over the life of the loan).
  • There shouldn’t be any Pre-Payment Penalties (penalties charged when you repay your car loan early, before the end of the loan repayment period), but make certain that this is the case with your loan.
  • Take your big, scary, haggling friend/parent with you when you go back to the finance manager’s office to negotiate financing. No matter what they say, you can have anyone you want in the office with you when you sign the paperwork (just to make sure that you have a second set of eyes and ears to confirm that you’re making a good decision). 
Edmunds.com – Community of web users that offer information on various cars and dealer information
Kelly Blue Book – Offers information on trade-ins and used vehicle information for free.
ConsumerReports.org – Statistical tests performed by trained professionals, offers non-biased verifiable information; requires a subscription fee.
Don’t Get Taken Every Time – Provides advice on negotiating with car salespersons. 
 


Determine Your Monthly Car Allowance