Car shopping

I don’t know anything about cars except that you shouldn’t put diesel into a car that doesn’t take diesel and also something about sugar in a gas tank will wreck the car?

Understanding cars is a monster subject. I don’t even own a car, so this is the first installment of a few guest posts by Darius about our most loved appliance.

You are ready to buy a car, you say?!  You have followed Kate’s budgeting advice and you want to hit the road.  Great!!  What do you think the first step is?!  Color?  Brand?  NO!  The first step should be listing the criteria you want your new car to meet.  Only one of those criteria should be price.  Here is a sample list:- How many people do you want to carry?  Seems simple but it is a valid question. Why buy a four door pickup that can seat six when it’s just you?! (a tip for the boys…size really doesn’t matter). Do you and your friends take turns being sober drivers? You might want more seats for more safety.  For the ‘about to have kids’ readers, the smaller the person, the more junk they need. ‘Lower lift height’ is a parent’s new best friend.  Plan accordingly.
– How much cargo do you need to carry/tow? Cargo capacity is not just the weight a vehicle can haul.  An SUV with a racy and slick curved rear roofline looks nice but you can’t fit nearly as much into the back as you can with an SUV that has a more squared off look.  It’s just geometry (<—this is the moment your math teacher told you about). *Note from Kate: my mom has a Honda Fit and one time we fit a shelf, two dressers, a nightstand, a mirror and two people in there without even breaking a sweat! That car is a miracle clown car!*
– What kind of mileage do you want?  Automakers want you to focus on the highway mileage of their cars.  Unless you are commuting 50 miles over a traffic-free highway per day, you want to disregard this number. The EPA has implemented it’s ‘combined’ fuel economy rating and it is the BIG number on the car sticker.  This is calculated using a mix of driving 55% in the city and 45% on the highway and should give you a better idea of what mileage the average user can expect (and should help you estimate gas costs)
– Do you live in an area that requires four or all wheel drive?  Four wheel drive (in most cases) weighs more and lowers fuel economy.  It also costs more (except on Subarus) and requires that much more maintenance.  Does it make the car safer to drive?! On snow, ice, hurricane level rains, mud, and loose dirt: yes. Otherwise…no. If you don’t live in an area where you need the extra safety, save yourself some cash and stick with two wheel drive.
– How much do you want to spend? There are a few options to get your hands on a car. You can:
  • Pay cash. This means no interest and therefore will save you money in the long run. Cash price=sticker price.
  • Finance. Remember this simple rule…on average for every $1000 you finance (fees and interest rates included) with a bank, it will cost you $16.67 per month in payments for a five year car note (60 months) (depending on your loan rates).  $17,000 financed = ~$283 per month. The total amount would be lower if you paid cash up front.
  • Lease. Leasing means that you can pay less to get a nicer car (overall), and you don’t have worry about maintenance because the car is under warrantee. However, this is not a good financial option because you end up with no physical asset at the end of your lease- you have been making monthly payments and when your lease is up, you have no car. For most twentysomething readers, this is a bad financial decision.
  • If you have bad credit, do NOT sign up for a high interest loan. Horror story from the front page of the LA Times here. (Summary: Ms. Lee paid $3000 down and signed a loan with 20% interest for a $7500 car. Over the next year and a half, she paid $6,966 more on the loan ($9966 total for a $7500 car). According to the terms of her loan, she still owed $11,610. When she fell behind in the payments her car was repossessed and she was left with nothing (even though she had already paid more than what the car was worth. This is not an unusual story. If you have $3000, buy a less nice car with cash and then save up for a nicer car.)
  • Don’t forget to budget in your insurance costs.
– Do you live in an urban or rural area?  Buying a 4X4 Heavy Duty pickup when you live in a city will mean that you will be very frustrated driving to (and parking!) any event in the city.  Parking spaces are tight and parking garages have an average clearance of 6′ 6″.  Consider where you live…trust me…you will do your future self a lot of favors.
Next time:  Resources for Car Knowledge.
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3 thoughts on “Car shopping

  1. Those are all good points! I didn’t know anything before buying my first car either.My budget was the first deciding factor, then I went to the Insurance Institute of Highway Safety to narrow my search down to the safest cars in each class. I went into the dealership with a pre-approved loan and the price given by my bank’s car buying service.

    It seems that new cars have a lower interest rate than used ones. My car has a 2.25% interest rate, while a coworker applied for a used car loan and it was 7%.

    • Thanks! I am not sure exactly why interest rates vary based on the age of the car but I would suspect that it is an incentive to buy newer cars because they depreciate so quickly early on, but I am not positive about this. Maybe Darius can chime in?

  2. @duaimei, you did all the right things. You considered some of your criteria including cost, checked some resources, and secured a loan prior to going to the dealership. Well done.

    Interest rates are a funny thing. Most think that an auto loan is based on a credit score. Well, a good credit score helps but what banks are really looking at is risk. They look at how many late payments you have made, how many credit card accounts are active, your total outlay per month, and the car you are financing. They want to make sure they get their money back plus the interest.

    So, if you buy a four year old car and try to finance for five years, the bank sees a nine year old car as their collateral if you end up defaulting or otherwise not paying your loan. The tendency is the older the car you finance, the limited term and interest rate you can get. Sometimes you can secure a low interest loan for a long term on an old car if the bank sees you as a low risk loan.

    I hope that helped shed some light on the issue.

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