A car is one of the most expensive purchases we make other than a home. It’s a big purchase, and it can be easy to get caught up in the excitement of buying the perfect one. Lucky for you, we have made plenty of mistakes when purchasing cars over the years, and we’re here to ensure that you don’t have to repeat them.
It is a difficult time to be in the market for a car right now. A historical chip shortage has led to long wait times for new vehicles, which has resulted in increased demand and prices for used vehicles.
So if you are looking for a vehicle right now, make sure you follow these 12 tips for how to save money when buying a car so that you can enjoy your new vehicle without breaking the bank.
How To Save Money When Buying a Car?
1) Know How Much You Can Afford
One of the essential steps in saving money when buying a car is determining how much you can afford to spend. Setting a budget will help narrow down your choices and avoid overspending on features that are not necessary for day-to-day use.
We always recommend setting your car purchase as a goal within your overall financial plan. Whether you are going to finance or lease the vehicle, set a budget for how much you can afford based on your net worth, monthly income, and expenses.
When creating a budget, don’t forget to include the estimated insurance, gas, and maintenance costs. Add these to your monthly payments to get an accurate idea of your monthly costs.
2) Go for a (Slightly) Used Car
New cars start losing their value as soon as you drive off the lot. According to CARFAX, new cars lose as much as 10% of their value after just a month. Then, within the first year, cars lose up to 25% of their value. So while there is an unquestionable comfort knowing every part of your new ride is brand new and unused, it is not worth paying the premium.
The trick is to purchase a used car with low miles on it. Traditionally, a used car with less than 25,000 miles can still cost 25% less than buying it new. This gap may have closed slightly in the current market conditions, but overall, you will still be saving money and won’t have to wait a month to get into the car you want.
3) Research for Reliability
Once you have a couple of cars and models in mind, check out Consumer Reports to ensure there are no concerning issues reported. Then, read their list of best and worst cars to buy, along with researching the specific make and models that are of interest to you.
4) Know the Market Value
Shopping around for deals and comparing different prices will help ensure that you know the fair value of your vehicle.
A site like Edmunds or Autotrader is convenient for comparing prices on new and used vehicles, getting online quotes, and understanding the fair market value of the car you want. Edmunds has a price value rating (Fair, Good, Great) based on the selling price compared to the rest of the market.
Even if you do not buy online, having a couple of quotes in your back pocket will give you confidence when negotiating with sellers.
5) Determine the Total Cost of Ownership
The total cost of owning a car is more than just what you pay for it. For example, how much will insurance be? How much gas does this car use per mile? How long do parts last, and how expensive are they to replace? For example, a new set of tires can easily run you close to $1,000!
Be sure to also take into consideration whether the car has had a lengthy history of maintenance issues. After all, these are things you need to consider when buying a new or used vehicle!
6) Negotiate (Overall Price, Financing Terms, Fees)
Once you have done your research and are confident about the car you want, it is time to negotiate.
Negotiate the overall price of the car before including any financing or fee. Be prepared to walk away if your offer is not accepted and the deal does not fit into your budget.
If leasing or financing through a dealership, be sure to negotiate the payment terms and interest rate. By doing this, you may be able to get a lower monthly payment over your desired lease term or a smaller down-payment on financing.
Look out for fees like freight, PDI, delivery charges, etc. Most of these can be negotiated down or removed altogether. For example, if your car is sitting on the lot, there is no need for delivery charges or freight.
7) Pay Cash if It Makes Sense for You
A cash purchase will eliminate any interest costs and give you some leverage for negotiation to remove any additional fees in exchange for an all-cash purchase. If you can afford to, pay in cash to get all these benefits.
Should you purchase your car with cash? As usual, it depends on your credit score, personal financial plan, and net worth.
- If you can get a higher return on your money, it may be worth financing the vehicle instead of paying cash.
- If you have high-interest debts, you are better off paying down the debt using the cash towards a car.
Aside from that, not everyone has enough money saved up to fund such a large purchase in cash in the first place. So let’s talk about monthly payments below.
8) Compare the Cost of Borrowing
To finance or lease, that is the question! In general, we recommend financing your car if you can afford it.
Tip: Get at least 2 to 3 quotes for financing. You’ll need a good credit score to get a better interest rate from your bank or car dealership.
How Does Financing Work?
You can finance almost anything these days, from a home gym to a television or a car. With financing, you receive a loan at a set interest rate and pay it off over a predetermined amount of time with (usually) monthly payments.
- With financing, you own the car after the finance term is over.
- Monthly payments and interest rates are higher when financing versus a lease because you are paying off the entire cost of the vehicle.
- There are no restrictions on the number of miles you can drive.
- Successfully obtaining and paying off a loan helps improve your credit score.
How Does Leasing Work?
- With a lease, you are simply renting the car over the term of the lease. At the end of the lease, the dealer takes the vehicle back.
- You are not paying the entire cost of the car, so the monthly payments are lower versus financing. Interest rates are also lower since the lender is assuming less risk.
- A lease usually includes a set number of miles that are allowed per year. The dealer will charge a flat rate for any additional miles over the limit.
- Any scratches or dents over a specified size will need to be repaired at your cost before you can return the vehicle.
9) Look Into the Car’s History
This is a critical step and saves you thousands in the long run.
A vehicle history report lists:
- Prior and current owners so you can verify that the person selling you the car owns the title to it.
- The vehicle’s accident and incident history, so you have a complete record of any damage and repairs to the car.
- Any safety recalls on the model.
You can order a vehicle history report from any approved providers here. Dealers usually provide these for free as well.
10) Get an Inspection
Before you purchase the car, get an inspection done by your mechanic. Do not put too much emphasis on a seller or dealer’s certification. Instead, drive the vehicle, test all functions, and get a thorough inspection from a trusted mechanic before handing over the money.
11) Don’t Buy the Newest Model
If you want a new car, avoid the latest model year. Dealers want to get rid of excess inventory and usually have great incentives toward the end of a model year. For example, let’s assume you go shopping in November 2021. A brand new 2022 Honda Accord will have no incentives, but you can save thousands on a brand new 2021 Honda Accord.
12) Avoid the Add-ons
Rustproofing, extended warranties, the premium leather package – you don’t need any of these. More often than not, the manufacturer’s original warranty is good enough for most catastrophic repairs. Unfortunately, unless you’re going shopping with your lawyer, extended warranty contracts have too much fine print to be of any value.
As an example, our friend purchased a brand new 2018 vehicle. Aside from buying a new model, she also made the mistake of paying for an extended warranty. Barely four years later, the car’s ABS system malfunctioned. Her claim was rejected because she had done a few oil changes at a non-authorized service center – a big no-no in the fine print of her warranty contract. She ended up footing the entire $6,500 bill.
We have heard hundreds of these stories and have concluded that it is better to stick to the basic warranty and avoid springing for any extras.
The process of buying a car is not particularly complicated. However, doing your homework, setting a budget, and following the steps above will make navigating your car purchase a lot easier and cheaper.
Now that you know how to save money when buying a car, what will you be driving next?