“I’ve always been asked, ‘What is my favorite car?’ and I’ve always said ‘The next one.’ ”Carroll Shelby, American automotive designer and racecar driver
Are you considering buying a new car—or perhaps a used car this year? If so, you’re not alone. And there are some things to be aware of in the current environment that can help you make the best choice!
In this article, we’ll consider:
- The trends that may impact your vehicle’s future value
- How to buy a vehicle in the most financially-savvy way
- What to know before you negotiate
- Helpful resources to assist you.
One of my mentors, Peter Diamandis, predicts that self-driving cars will make car ownership a thing of the past for urban dwellers within a few years. Already, we’ve seen taxis, Uber, Lyft, and public transit replace car ownership for many in cities such as New York and San Fransisco. The transportation-as-a-service trend continues, but it hit a hitch in 2020.
Even for those who used to ride the subway or carpool, the Covid crisis inspired a surge in car buying. In a world where people are discouraged from being within 6 feet of strangers, this is understandable! So for now, many people will continue to gladly pay to drive their own vehicles.
Vehicle Trends and Timing
In general, 2020 was not a good year for vehicle sales. Many consumers halted major purchases. Yet as the year progressed, vehicle sales picked up steam. This led to GM selling 5% more vehicles in the final quarter of 2020, even though they sold 12% fewer cars during the year overall.
In spite of 2020 challenges, sales of one kind of vehicle soared: electric vehicles. EVs continued to gain market share, with some EV brands seeing notable year-over-year gains. Tesla delivered 36% more vehicles in 2020 than 2019. In 2021, Tesla predicts a further 50% increase in deliveries.
Whitney Tilson, investor and former hedge fund manager, explains why the electric vehicle trend will disrupt the industry as we know it—and sooner than we think. As he says, it’s simple economics.
Every year, Bloomberg updates its model for the crossover point when electric vehicles will be cheaper upfront than a combustion vehicle. In 2017 it was 2026 (9 years). In 2018 it was 2024 (6 years). In 2019, it was 2022 (3 years).
Now, what happens when consumers can choose between an electric vehicle they can charge and a more expensive vehicle that needs gas? Internal combustion engine vehicles will quickly become less desirable.
Another big trend in vehicles is autonomous driving. In the next few years, autonomous driving vehicles will begin to take over the road. Today, many cars have features that help guide drivers and alert them to dangers. It is a wise time to purchase cars that offer some level of driver assistance to slow down your new vehicle’s obsolescence.
If resale value is something you consider when purchasing a vehicle, these trends should be factored in. It may not be long before an electric motor and autonomous driving capabilities become standard features desirable to most drivers!
How Much Will You Really Pay?
According to Credit Karma, the average monthly car payment rose to $568 for a new vehicle in 2020 and $397 for used vehicles. And the most common car loan is now 72 months—a full six years!
Prosperity Economics teaches to not just look at the cost, but to also measure the OPPORTUNITY cost of a vehicle. If you’re paying $35k for a car, you’re not simply paying $35k (plus tax, insurance, gas and maintenance.) You’re also losing out on the potential gains that $35k could have earned you.
I’ll let my brilliant husband, Todd Langford, demonstrate this with his Truth Concepts software:
Drive Away with a Deal!
Follow the tips below on buying a new car to get a great vehicle without sabotaging your savings:
Determine your price range. Now is a good time to conserve money, so decide what you can comfortably afford before you shop. Choose a price range that works for you, and do some research online to find cars you like, ideally with excellent ratings for reliability.
Finance the car, invest the difference. It doesn’t make much sense to pay cash for a car when you can get financing for less than 5%, which is very doable right now. So rather than dropping a chunk of cash on a new car, invest that cash and make payments from the cash flow. Then when the car is paid off, you’ll still have the car AND your cash!
Take the rebate or the low rate? Both! How can you finance a car without missing out on those dealer incentives, which are only available to those paying cash? To have your cake and eat it, too…
Bring your own financing. Whether you’re buying new or used, you can often negotiate a better purchase deal by lining up your own loan before you shop. Credit unions usually offer competitive rates, and you can check with your local bank as well. Get pre-approved and you’ll have more options and better negotiating power.
Buy almost new. Let someone else enjoy the new car smell, while you take the discount. We don’t have cheap taste in cars, however, we do love getting what we want for substantially less than blue book prices! Our practice is to buy “nearly new,” perhaps a year or two after someone else drives the vehicle off the lot and takes the initial depreciation hit.
If you purchase a certified pre-owned (CPO) vehicle, they are still under warranty, they have passed a detailed inspection, and you may actually qualify for better financing than with an older or non-certified vehicle. Find out more about CPOs in this Kelly Blue Book article.
Negotiate in the right order. We have a whole section in a recent book, Busting the Interest Rate Lies, that explains (among other things) the importance of negotiating things in a certain order. You’ll want to focus on price first, then trade-in, and financing last. Most dealers will try to get you focused on the payment you can afford, a common strategy to get you to NOT focus on the price and terms, such as interest rate or trade-in credit.
The no-haggle option. Some companies such as Costco offer no-haggle options where you are likely to find a competitive price on a new car without negotiating.
Consider selling the car you’re trading in. Everyone tends to focus on the price they are paying, but what about the price they’re getting for their old car? This article from Kelley Blue Book has some good advice for getting the most for your trade in. It can also be well-worth making dealers compete on the trade in if their pricing on the car you want is similar.
Do the math before you buy. I’ve seen people not run the numbers and end up paying more for the dealer’s “0% financing” because without the dealer rebate, the car costs more than if they had taken the cash incentive and financed the car with a loan from another institution. See “How 0% Financing on a Car Isn’t Always 0%!”
Buy vs. lease. According to Success.com, 94% of wealthy people prefer to buy their cars, while only 6% choose to lease. However, if the vehicle will be a business write off or if you really need the lower payment, a lease can work.
Just say no to the extras. When you purchase a car from a dealer, every effort will be made to sell you things you don’t need to increase their profits. In most cases, that extended warranty, servicing package and gap insurance will just be added expenses. Just put that extra money into savings and you’ll be better prepared for unexpected costs.
Keep it longer. One of the best ways to save a small fortune on cars is to simply purchase one less often. Can your car last for 10 years instead of automatically buying a new one every 5 years? When you consider the opportunity cost, you can see that keeping cars longer puts six or figures into your pocket over time.
Money-Saving Resources for Car Buyers
Take advantage of the excellent resources for buying a car!
TrueCar.com gives the price actually paid for new and used cars in your area and pairs buyers with certified dealers. It serves as a middle man to simplify negotiations and buyers are ensured they aren’t over-paying.
Carvana.com specializes in 7-day test drives and “vehicle vending machines” that deliver your car to you. (You can also have it delivered to your door.)
CostcoAuto.com offers extremely competitive pricing to Costco members hassle-free. However, not all makes and models are available.
Vroom has a “buying made easy” slogan. The company helps you choose and finance a used vehicle, then Vroom delivers it to your doorstep!
Edmunds.com offers instant appraisals and offers on your used vehicle and connects buyers to new or used cars.
If you are buying a new car this year, we hope you’ll find the perfect vehicle at the perfect price!
Want to talk personal finances? Partners for Prosperity is here as your sounding board. If you have a question or want assistance with life insurance, self-directed IRAs, or tax-saving investments, you can send us an email or schedule an appointment to explore further.