When Should I Buy a New Car?

Major auto makers are turning up the volume on pitches to promote the idea that now is a golden time to acquire a new car. The most recent one I have heard and read is that they are pricing cars at an “employee benefit” level. Supposedly they are selling them to consumers at a price previously available only to their employees.

Some dealers are claiming to sell them to you exactly what they paid for them! While few consumers are naïve enough to believe claims of that sort, the facts remain that many are tempted and new car sales are very strong. Here are some points to keep in mind if you are thinking about buying a new car.

Wear Out Your Old Car Until the Loan is Paid Off

Latest information shows that many new car buyers are trading before the loan on their present car is paid off. Sales in 2005 show that 36 percent of trade-ins still had payments due on them. When you trade-in a car that still has time to run on the loan or lease you are in what the auto industry calls “negative equity.” The longer you own your car, the more you are getting out of it. The average amount of outstanding loan balance on the 36 percent of trade-ins so far this year is $3,600. Contributing to this situation are the 8 year loans some dealers are giving on a car; most people don’t keep a car for eight years, as five or six years is the average. This argues for you to keep your current car until all loan payments are made so you do not have to carry a negative equity to your new car loan.

When You Get Ready to Buy

When you get ready to buy, only buy what you need, don’t buy too much. In order to move some of the large SUV’s and trucks that are not selling well, auto dealers are offering some big discounts and many buyers are ending up with vehicles that are much bigger than they need. Then follows the shock of having to pay a small fortune to fill the tank. Worse than that is the reality of having to shell out 20 to 25 percent of your take home pay to cover the monthly lease payments. That big Lincoln Navigator looks great in the driveway but peanut butter sandwiches get old fast! Then, too, always remember that expensive vehicles are also expensive to service and repair.

Resist the temptation to buy or lease more car than you really need. As a matter of sound budgeting, never agree to monthly payments on a new car that will require more than 15 percent of your take-home pay. Ten percent would be even better!

Make a Down Payment on Your New Car

Even if your car dealer does not require it, a good rule of thumb is to make at least a 10 percent of selling price down payment on that new car. Years ago car dealers and auto loan companies required a 20 percent down payment to protect them from the high depreciation new cars experience in the first year. Depreciation in value is a major factor to consider when you are deciding what to buy. A popular Web site on auto costs and values is Edmunds.com. It has a “True Cost to Own” feature that gives depreciation costs on most models. Some makes and models are shown to lose as much as 60 percent of their value in the first three or four years while others will lose less than 40 percent in that same period of time. Depreciation rate and resale value are very important considerations in making your choice.

Don’t Take the First Loan Arrangement Offered

Frequently you can find a better deal by shopping around. Look for the best combination of interest rates and length of loan. If you have access to a credit union, look at what kind of a deal you can get from them.

Currently auto dealers are offering loans for six, seven and even eight years. The experts all advise staying away from loans that run longer than five years. The higher the interest rate is, the shorter period of payments is best. It is a good idea to check out loan rates and number of payments before you go to a dealership and start looking at cars. In addition to checking with your credit union you can go to the Web and check sites like LendingTree.com and CapitalOne.com. Copy the information and take it with you when you start visiting dealerships. If you get into a negotiating session with a dealership salesperson let them know you have the information and make them give you a better offer!

If you don’t mind spending $12 you can use the new car price service offered by Consumer Reports. They will provide the Wholesale Price, the Invoice Price and Sticker Price. You can begin bargaining with the Wholesale Price, the dealer wants you to begin with the Sticker Price!

You can contact the New Car Price Service by calling 1-800-509-9361. When it comes to buying a new car the time and effort you put into getting informed can save you big bucks when negotiations begin.

B.R. Poulton, Ph.D., L.L.C.