Lessons Learned: Auto Buying Tips

Quite often, the purchase of an automobile is the largest purchase one will make aside from the purchase of real estate. Although most homes cost more than cars, there are some parts of the country where luxury and heavy truck retail prices rival a nice piece of rural land in the countryside. I have purchased six vehicles in my adult life and my first one was gifted to me. I’ve also sat in with some of my friends and helped them navigate the negotiation.

My former 2013 Tacoma the day of purchase- An impluse buy made on a Sunday afternoon – by W. Vance

My first advice, which most people won’t take, is to buy a vehicle that you can pay cash for. Why?  Not having the burden of a car payment will greatly increase your ability to build wealth.  If you pay cash, the average person will purchase a used car, which most likely has taken the large depreciation hit compared to a new car.  Never call a car an investment.  An investment is something that is expected to provide a future return, and in the context of this blog, that should be a financial one.  A vehicle is an asset that is consumed over the years.  With that said, I’ll get into my tips from my 20+ years of experience in this area.

1. Always set a budget before leaving for a car lot, even “just” to test drive.  So many people with car fever will leave the house, or even stop by a car lot after a relaxing Sunday lunch to check out that dream car.  The next thing you know, you are driving off the lot with that car, or even worse, less of a care than you dreamt of, and an unplanned payment due in 30-90 days.  Instead, sit down and decide what your budget reasonably allows, payment-wise.  Don’t forget to check insurance rates on the model(s) you are considering and understand the costs of routine maintenance.  Fuel economy should also be brought into the mix, depending on expected miles driven each month.

2. Once you have a monthly budget amount in mind, use an auto payment calculator to figure out how much the total cost should be and make comparisons. Also, check your credit and see where your score is. If you have an idea of your credit worthiness, you can shop for financing before heading to the deal. Also, check the dealer’s website because I have seen dealers advertise low APR financing on certain models with certain minimum credit scores. If you don’t mention this when you sit down at the deal desk, they surely won’t automatically apply that rate. Car dealerships are out to make a profit, so if they don’t know you came in because of a special deal, they surely won’t just reduce their profit to be nice.

3. Now that you know your monthly auto payment budget, start by going to KBB.com and figuring out the cost of the vehicle you want to purchase. You can change the year and options to see the price different option levels will command. You might even see ads for nearby dealerships with pricing.  You can look at these, but also check different dealer websites to find inventory of the model you want to purchase.  If inventory is limited locally, check dealerships within a day’s drive to see if you can get substantial savings that way.  I know several people who have found a vehicle that is super popular in our area for several thousands less, plus the dealer paid for a plane ticket and cheap hotel.  Details were worked out online, so all that was left to do in person was sign and drive!  Some dealers within a few hour’s drive will even deliver the vehicle to your home or office.  Just remember that the more service or extras you want, the less they will deal on the price.  If you’re a member of a club store, like Costco, see if they have any member exclusives.  Alternatively, mention you are a member to the dealer you are working with and see if they can give you that price.

My current vehicle, a 2016 Tundra, purchased after much thought and negotiation – By W. Vance

4.  When you’re on the lot, or even conversing online, do not become attached to a particular vehicle!  Remember, autos should be treated like commodities, unless you are buying a unique collector car.  In that case, you should have amassed a large net worth and pay cash for your collector car.  This is not the same thing as sensibly purchasing reliable transportation.  Remember there are many vehicles that are the same out there.  If you get emotional, you will probably end up overpaying for the vehicle and possibly taking on too much debt and interest.

5.  Know the total price, not just the payment amount!  This is so important. If you know how much the vehicle will be, sales taxes, registration, and any other required fees, you should have a limit as to how much the vehicle will cost.  Typically, dealers negotiate on a payment basis.  In this case, they will “bake in” profit-heavy items, or even inflate the interest rate beyond what your credit score dictates.  Dealers make profit by selling you a higher interest rate than you qualify for and sell it at a premium to finance companies.  Always shop for a car loan independently, and if the dealer can beat that rate, then go for it!  That’s the power of shopping around and being well informed. 

6.  Avoid add-ons at the signing table.  Almost always, the “finance” person who you sit down and sign documents with is required to talk you into add-on items that are highly inflated.  Do not buy extended warranties, clear bras, after market anti-theft devices and so on.  Instead, note items you are interested in and shop around afterwards.  Sometimes, the service plans can be a good value if you like having your vehicle serviced at the dealer.  Ask how much each required service costs if done a la carte, and you will notice if there is substantial savings.  If you are worried about the car you are about the buy breaking down, you should first think about why you are buying an un-reliable car, and also you need to have your emergency fund in place to cover any unexpected repairs.  Inquire about any included warranties and what systems are covered.  Even a newer, used car will typically have some portion of the original manufacturer’s warranty left, which may give you peace-of-mind. 

7.  My final rule: Never be afraid to walk away!  When you buy a car, unless it’s a Tesla, you should understand it is a business transaction.  Always be ready to politely walk away from the negotiating table if they cannot meet your reasonable requests.  If you have a reason that they should lower their price, or throw in an incentive, you should have some proof that the competitor is doing that, or you can pull it up online.  Always back-up your counter-offers with facts.  If you do this, you will either buy the vehicle from them or the other guy with the best deal. 

Again, there’s always another car like the one you want, another dealer willing to give you a better deal, and you are in control. Don’t have regrets after you drive away. If you are unhappy with your purchase, it is likely you will trade it in sooner and end up paying more over your lifetime for cars. If you’re in the wealth accumulation stage of life, you can’t afford to roll over and just do what feels good. Save that for the grocery store or dinner date with your partner!

I want to hear your best or worst car buying experience!  What happened? Share your story in the Comments field below.  As always, thanks for reading my blog!

Credit Scores: Playing the game

If you’ve been following my posts, you probably realize I’m not very excited about debt.  Like most things I’ve ever wanted in life, a great credit score is something that I wanted for years and today don’t care to use very often.  I used to be all about getting the best interest rates, but today it’s about saving as much as I can to build wealth and realize my next big dream of owning a house I designed, on a good sized lot, away from people.  Well, far enough away that my Great Danes barking near the house won’t both my neighbors. 

Image from wsj.com

I learned a long time ago, building credit is a like a game.  It’s you against your creditors.  If you minimize your balances and carry almost no credit card debt, don’t open new accounts often and always pay on time, you will build a great score after several years with minimal interest paid, and you win.  If you’re impatient, run up your cards near or over their limits, and pay late, you’ll suffer financially and you lose on interest and fees and your score is lower. My advice is to never open a card account if you don’t have self-control.  I do admit having self-control with credit and the self-control to stick to a budget is pretty much the same thing. 

Throughout the years, I have found it much easier to spend on credit.  Every automobile I have purchased was on credit, although through each car acquisition, I had more down and a priority to pay off the load as fast as possible.  Now that I have enough saved to go out and buy a car with cash, I wouldn’t dream of parting with my hard-earned cash.  I’ll continue to enjoy my paid-for truck for years to come. 

What makes up your credit score?

Generally, there are five attributes that are counted in your credit score (listed in order of importance):

  • Payment history:  Do you pay on time? (35%)
  • Amounts owed:  How much of your credit lines are utilized? (30%)
  • Length of credit history:  How old is your oldest account and the average age accounts? (15%)
  • New credit:  How many new accounts do you have and can you manage them? Inquires? (10%)
  • Types of credit used:  What is the mix of cards, installment loans, and mortgages? (10%)

For more detail on what makes up the average credit score, check out this old CNBC post as it is still relevant today!

Each attribute is weighted more than the other because paying on time is more important than your credit mix, but it all adds up.  This is why you can build a decent score in as little as two years, but it will take seven or more, and take multiple loan types, to show you really know how to handle your debt load.

To have the best scores, you should rarely apply for new credit.  Once you find a great credit card, if you use one, stick with it.  Don’t try to open up new cards in search of better rewards.  Also, if you do open a new credit card, do not close the old one unless it has an annual fee.  Try to keep the card active by charging something every few months and paying it off before interest accrues.  I have a lot of good card accounts that I have obtained over the last 20 years, and keep open just because of age and the high limits help me ensure that even if I have a balance of $5,000 or so one month, my utilization is only around 2-3% of my total credit lines.  Always keep your purchases well below your limits.  If you keep getting close to the limit but pay it off before interest is due, apply for a credit line increase to help keep your score high.  Remember the credit is like having money.  The more you have, the less you need, and the more attractive you are as a borrower (until you borrow too much!).

As far as credit mix, having auto loans, student loans, and mortgages will all help your score.  Mortgages are considered “good debt”, which is debt that shows you are really responsible and making sound financial choices.  Also, it usually means you have equity and assets, which means if you don’t pay your creditors, they can try and put a claim towards your assets and gives them a little more assurance you will pay them back.  Most people who own homes are responsible and want to keep their home, therefore why credit card companies love homeowners.  If you have not assets, besides retirement assets, you are judgment proof and if you default, creditors will have no asset to try and claim, so all they get to do is put a bad mark on your credit and make it impossible for you to borrow until you clean up the mess or it ages off your report in a decade.

Earlier, I mentioned that I don’t strive to have the best credit cards or brag about my credit score.  As I’ve learned through the years, showing how much you can borrow through flaunting lavish houses and flashy cars is not the best use of credit.  Instead, build credit to get the best mortgage rate and know that insurance companies look at credit scores when setting auto premiums.  When you do borrow, do it strategically.  For instance, I really am tempted to pay down my mortgage, but my interest rate is so low, that I feel good having a beefy emergency fund and plunking a large amount of my paycheck into retirement.  Based on historical, long-term returns, I will come out ahead having my cash compounding at 8-12%, rather than at 3%, which is what I get while I pay off my mortgage. 

I do agree with Dave Ramsey that you can pay your house off quickly and then shove boat loads of cash into investments afterward, and probably come out about the same, and there is more risk involved with holding a mortgage, but I do insure against potential chaos with a large emergency fund. If I had kids depending on me, I might change my strategy, but being single, I feel pretty good about my risk levels. 

How do you feel about the use of credit scores in consumer lending?  Is it a fair practice?  Do you think that creditors should look at other factors besides a score? Leave me a comment! I’d love to hear from you.