BUYING (and keeping) A CAR From Walking on the Lot to Driving Away (4-part series) Part 1 – Buying a Vehicle

PART 1

BUYING A VEHICLE – whether it’s a car, truck, SUV or other set of wheels – can be a remarkably complicated undertaking, with many decision points baked into the process. There’s a lot of industry-specific jargon, large numbers and high-pressure sales tactics. There are also a lot of moving parts, which can be overwhelming.

Before you step onto the dealer’s website or lot, have a talk with someone at the credit union. There are peculiarities to every situation, and you deserve to have someone you trust helping you look at yours. This way, you can go into a dealership forewarned about some of the biggest hurdles you’ll face during the car-buying process.

Do I buy new or used? There’s no one answer to this question. Much of it depends on your personal situation. Here are a few key factors to help you make up your mind.

1. WARRANTY
   • First, there’s the case of the warranty. Almost all new cars come with a built-in manufacturer’s warranty that’s good for three years or 60,000 miles. This is an invaluable benefit to buying a new car, as even the best-engineered machines sometimes break down. In addition to major repairs, some warranties cover routine maintenance, such as oil changes. If you have someone else covering the expenses for the first three years, that could be money you’re saving. You’ll want to make sure you stay on schedule for that routine maintenance, though, or you could invalidate your warranty.
   • Since the warranty applies for three years, you can sometimes find recently used cars that still have the original manufacturer’s warranty. If you buy a used car more than three years after it was produced, that warranty will be gone, so you’ll be on your own for mechanical issues that may arise.
2. REPAIRS
   • Vehicle repairs come with the territory of car ownership, whether you’re buying new or used. No matter how well the car is made, some parts will wear out over time. While you can expect to pay more to maintain a used car than a new one, no one gets away completely free. For example, Kelley Blue Book estimates that, in the second year of owning a Honda Accord EX, drivers may have to spend as much as $1,838 in repairs and maintenance. Those costs typically plateau as the vehicle gets older, but they never go away.
   • Given the possible expenses involved in repairs, buying a pre-owned vehicle can be a bit of a gamble. Of course, if you’re buying from a lot that’s connected to a trusted car dealer, it’s a pretty safe bet. Many lots inspect incoming cars and perform any necessary repairs or polishing. You’ll have to pay a little more at first, but the extra costs will buy you the security of a car without major problems.
   • Typically, a dealership that also sells new cars will spend the time and money to ensure its used inventory is also up to snuff. Buying from a used car specialist or looking for a vehicle on a site like Craigslist can be a bit riskier. It’s cheaper, but you’re going into that deal with no idea what the past owner has done to the car. The risks could include anything from a terrible smell to that dreaded check engine light. Whatever it is, you’re either going to have to live with it or pay to fix it out of your own pocket.
3. DEPRECIATION
   • Depreciation is a big concern when buying a vehicle. Depreciation is an asset’s loss of value over time. For all the reasons we’ve talked about and others, a car is worth less the longer it’s out of the factory. The biggest depreciation occurs immediately. Any car depreciates by approximately 11% of its original value as soon as it leaves the lot for the first time.
     • For example, a 2017 Toyota Prius V new costs $26,675. It would depreciate by $2,934 as soon as it rolls off the lot. That’s $2,934 you’ll never see again, and that’s only on the first day. Within the first two years, provided you’ve kept the car in near-perfect shape, the car will be worth just 74% of its initial purchase price. So that same Prius V would now be worth only $19,739 – meaning you’ve lost $6,936.

Before buying new, be sure you’re ready to make that hefty commitment.

If you’re buying used, the loss that new car buyers experience is your gain. For starters, all that money now gone to the depreciation is money you save. If you just wait on buying that Prius V until 2019, you’ll be able to buy it for only 74% of what it was originally worth. Not to mention that after the 26% a car loses in the first two years, the amount lost in depreciation drops significantly every year. After the third year, you’d lose only 7% of the original value. After that, the value lost to depreciation is just about negligible. That means that not only do you save more than 25% when you first buy, you also don’t need to worry as much about losing money to depreciation. The money’s already been lost by someone else; it’s not your problem!

Everyone buys cars for different reasons. That means that what they’re looking for in a car is different, too, as are the reasons they’re willing to save or spend money. Everyone has a different reason to decide whether to buy new or used. But if your goal going in is to save as much money as possible, there are some definite things you’ll want to keep in mind.

• Am I willing to take the risk on the car surpassing its warranty?
• Am I willing to pay extra for maintenance and repairs?
• Do I want to take a chance that the past owner treated the car poorly?
• Is it worth losing so much money to depreciation?

The more questions you ask, the more confident you can be in your decision to buy new or used.

Whether you choose to go new or used, you’ve only just begun making decisions. Your biggest choice comes in deciding what kind of car to get. This is probably the biggest purchase you’ll make other than your home, so you’ll want to be confident in your decision. If you’re stuck, consider the following:

1. RESALE
   • How long do you plan to keep your car? Do you plan to drive it until the wheels fall off, or do you see yourself wanting to upgrade in a few years? If this is a car you plan to own for less than five years, you need to look at the potential resale value.
   • Cars from luxury brands, such as Lexus and Acura, tend to hold their value well. Cars with a reputation for longevity and dependability, like Toyota and Subaru, also tend to depreciate slower than other brands. Also, look for relatively recent vehicle lines. These are car models that will likely still be in production several years from now, ensuring parts and service won’t be hard to come by.
2. DAY-TO-DAY
   • Many people start car shopping by making a list of things they occasionally do or want to do someday. They may want to own a boat, so they need a car that can tow. They go camping sometimes, so a car that can off road is preferred. This is a good way to end up with more car than you need.
   • Instead, look at what you use your car for daily. For most people, this is a commute to work and back. For this, you need a comfortable car that gets good gas mileage and is easy to park. For special occasions, you can always rent a car or truck. How many times a year do you see yourself picking up furniture or hauling a trailer? If it’s less than five, remember that you can still rent a truck or van for such occasions.
3. BUYING OR LEASING?
   • You have options when it comes to how to purchase your car. You can buy it, which means you’ll take out a loan for the purchase price. When the loan is paid off, the car is yours, free and clear. You can also lease a car, which is essentially a long-term rental. At the end of the lease term, you may have the option to buy the car, depending on the terms of the lease. If you choose not to purchase it, you may be charged penalties for things like mileage or damage to the vehicle. If you wreck the car, the insurance company will make the deal whole before they concern themselves with your damages.
   • Leasing a car isn’t as good a deal as buying. If you absolutely must have a top-end luxury car, a lease is one way to make it affordable. The tradeoff, though, is that you are building no equity. You’ll never be able to get a trade-in, and you may have to make expensive penalty payments when getting your next car.