SOME TIPS ON HOW TO BUY A Car By Christina Mae Olson, CFP®
Happy New Year, everyone!
A few days ago, a client in Milwaukee asked me for some advice about buying a car. She asked me about how to negotiate the purchase price and she wanted to know the best way to finance the purchase. These are loaded questions. She had already decided to buy a new Prius and declared that the new ones didn’t cost that much more than the used ones. This isn’t exactly true, but at that point, it wasn’t my job to argue with her about it. We had already discussed the financial hazards of buying a brand new car and I hadn’t been able to dissuade her away from it. After all, a new one (even a Prius) will loose thousands of dollars in value the very minute it’s driven off the lot. Why not let someone else take the depreciation on a new car – and you can buy it when it is two years old? In the case of a Prius – you’d pay roughly $10,000 less for a 2007 in good condition compared to a brand new 2009. Here is the response I wrote to her about financing and purchase price (you’ll see that I did attempt to slide in another plug for buying a used car).
“Ask your accountant if you are at risk for paying AMT tax this year. That's the "alternative minimum tax" that the IRS imposes on taxpayers with moderately high incomes and lots of deductions. If you won't be subject to the AMT then I'd definitely choose the HELOC option for your loan. This is the only way your interest will be deductible.
“Of course, you should pay as much from cash as possible for this car. Whatever you do borrow - make sure you can pay it off quickly (two years!). Any interest you pay on a loan over time just makes the car that much more expensive.
“When you negotiate for the purchase price, use the invoice price (for a new car) or the fair value (for a used car) as your starting point. I'm sure you've checked this out in your research - www.edmunds.com (Edmunds) will have that. So will www.kbb.com (Kelly Blue Book). You can get a very detailed report for $12 - $15 from Consumer Reports on the invoice/value of the car you want (plus invoice prices on the bells/whistles). I sure wouldn't buy from a dealer, but if you do, don't feel sorry for them "loosing money" on a deal. I've bought cars from dealers in the past with 0% over invoice. They are getting paid in so many ways when they sell a car - not just from the money you pay for the car.
“If you buy a used Prius from a private party you can use the "private party value" from Kelly Blue Book (or Edmunds, for that matter). I did a search on the value of a 2006 Prius in good condition with 50,000 miles and got a private party sale value from $13,900 - $16,200. I did a search for this car in the Milwaukee area and found one (2006/46,883 miles) at a dealer - Safro - and they want $20,920 for it. If you can find the same car for private sale, you'd expect to pay no more than $16,200 for it. It makes sense to stay away from the dealer, if possible. You know Safro probably gave $10,000 in trade in for that car so they'll get nearly $11,000 in profit if they sell it for $20,920. Yikes! What a racket.
“If/when you are ready to make an offer (private party or dealer) you should get a vehicle history report from www.carfax.com. This will tell you if the vehicle has been in an accident or flooded and reconditioned, etc. You'll need the VIN for the report. If the seller won't give you the VIN before you buy the car then you don't want that car!
“Whatever you do, don't negotiate the purchase based on the monthly payments. The final purchase price is your objective. I would NOT get a loan from a dealer.
“I hope this helps. Have fun and let me know what happens.”
Note: Some details have been changed to protect the innocent. She did write me back and joked about how only I’d see the process of buying a car as “fun.” At least she knows that she can’t just go into a dealership and pay the sticker price for her new car! Negotiating the price of a new car can be painful but it is like a game – and it happens to be a fun game for me!
Chris Olson is a certified financial planner™ with a fee-only practice. You can reach her at CMOney@centurytel.net or 608.525.9818.