“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
One of my mentors, Peter Diamandis, predicts that self-driving cars could make car-ownership obsolete for urban dwellers within a decade. But for now, most people continue to gladly pay a premium to drive their own vehicles. This makes financial planning to buy a car a necessity that has potholes (pardon the pun).
Cars are expensive, often a household’s second largest expense after housing. In this article, we’ll give some perspective on the industry and look at ways to lessen the financial impact of the driving habit with savvy strategies and resources to help you avoid car-buying mistakes.
Timing and Trends: Supply Is On Your Side
The auto industry is going through a number of changes, some of which may present opportunities for buyers. 2016 was a record-setting year, sales-wise. Although the new high represented a mere .03% growth, according to AutomotiveNews.com, it was the seventh year in a row for gains, a welcome turnaround after the Great Recession obliterated the industry.
Many automakers got a bit overzealous with early 2016 gains, increasing production until sluggish sales towards the end of the year left dealerships with uncomfortably high inventories by December. That has meant increased incentives for buyers as car manufacturers seek to decrease supply while holding onto market share.
In December, auto analytics company ALG reported that average incentives soared 20% in December to $3,673. This week, Consumer Reports published an article, “Best New Car Deals,” with a list of cars offering incentives of 5% – 15% or more off of the MSRP. And according to RealCarTips.com, Ford is testing different incentive packages after suffering big sales losses, and car makers such as Fiat and Chrysler have hidden rebates that result in up to 28% savings off MSRP.
“Substantial incentive hikes … haven’t resulted in retail growth, while inventories continue to grow,” said Tim Fleming, an analyst at Kelley Blue Book. Between the incentives, some lingering 2016 models on the lots, and the fact that the start of the year tends to be slow, you can do well negotiating on a new car now, especially during the last few days of the month, when salespeople are trying to meet incentives.
As already mentioned, the trend towards self-driving cars will have enormous impact on the industry. It could be a wise time to purchase cars that offer some level of driver assistance to slow down your new vehicle’s obsolescence, as well as to take advantage of the safety features.
While completely autonomously-driving cars are not available yet to the masses, you can purchase cars with level 1 and 2 capabilities without spending an arm and a leg. (See Wired’s “Everyone Wants a Level 5 Self-Driving Car — Here’s What That Means” for an explanation of the levels.)
For instance, Subaru’s “EyeSight” technology alerts drivers to cars in their blind spots, lane departures, sharply slowing traffic ahead or, conversely, when a stopped car in front of you moves and you don’t (just in case you’re replying to a text at a stop light). Other features enable the car to gently correct steering should you wander outside the lines and follow the car in front of you at varying speeds. And the automatic braking system will stop the car even if you don’t.
How Much Will that Car Really Cost?
According to Experian, Americans set new records with their car loans in 2016. For the first time, the average car loan topped $30k at $30,032, the average car loan payment inched past $500/month at $503, and the average car loan term also hit new highs at a whopping 68 months!
Prosperity Economics teaches to not just look at the cost, but to also measure the OPPORTUNITY cost of a vehicle. If you’re paying $30k for a car, you’re not simply paying $30k (plus tax, insurance, gas and maintenance, of course.) You’re also losing out on the potential gains that $30k could have earned you.
I’ll let my brilliant husband, Todd Langford, demonstrate this with his Truth Concepts software:
The Affordable “Car” Act
Follow the car financing tips below to get a great car without sabotaging your savings:
Do the math before you fall in love. We’ll all heard the phrase “champagne taste and beer budget.” Make sure you know what you can comfortably afford before you shop. Making a major purchase can be an emotional decision, but it doesn’t have to be driven only by emotion. Decide on a price range that works for you, and do some research online to find cars you like, ideally with excellent ratings for safety and reliability.
Finance the car, invest the difference. Mathematically, it doesn’t make sense to save up and 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! Check out our Ultimate Guide to Financial Planning Myths to learn more about car buying strategies.
Take the rebate or the low rate? Both! How can you finance a car without missing out on those fantastic dealer incentives, which are only available to those paying cash? One way to have your cake and eat it, too is to…
Bring your own financing. Whether you’re buying new or used, you can often times negotiate a better purchase deal by lining up your own loan before you shop. Credit unions tend to offer the best pricing, although you may want to check with your local bank and also ask the dealer what they can do for you. Get pre-approved and you’ll have more options and better negotiating power. (Just don’t spend weeks comparing different finance options… your credit score can suffer if you let multiple lenders check your credit over too long a time frame.)
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 that 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. I 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, finally, discuss financing. Most dealers will try to get you focused on the payment you can afford, because that’s a common strategy to get people to NOT focus on the price or terms, such as the interest rate and term, or not to negotiate a fair trade in price.
Negotiate online. Much car bargaining happens online now. Many dealers even have salespeople whose job it is to respond to inquiries, and sometimes the “internet sales division” is authorized to offer cars for less, as chances are you’ll never make it to the lot if they don’t give you their bottom-line pricing. (Also see the resources below.)
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 in the LA Times has some good advice for getting the most for your trade in, and sometimes you can get thousands more by selling it to a private party. 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 again before you sign the papers. 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 ends up costing 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, as reported in ZeroHedge.com last year, 32% of car purchasers are choosing leases rather than buying outright.
Generally, buying a car is the better deal, unless you tend to get a new car every 2 or 3 years. But if your vehicle lease can be a business expense, consult your tax advisor and do the math… you might find that leasing fits your situation better.
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, which exponentially increases their profits. In the majority of cases, that extended warranty, servicing package and gap insurance will just be added expenses you don’t need. If you are buying an older or a less reliable car and you have a limited income and no savings to cover for emergencies, you might consider it, but chances are you’ll be better off if you simply put that extra money into savings.
Keep it longer. One of the best ways to save a small fortune on cars over your lifetime is to simply purchase one less often. Can your car last for 8 or 10 years instead of automatically buying a new one every 3 or 5 years? When you consider the opportunity cost, you can see that keeping cars longer can put multiple six figures into your pocket over time.
Money-Saying Resources for Car Buyers
Take advantage of the excellent resources for car buyers. The websites below offer valuable services and advice that could save you thousands:
TrueCar.com gives the price actually paid for new and used cars in your area, and pairs buyers with TrueCar certified dealers who email you upfront prices. It serves as a middle man to simplify negotiations and buyers are ensured they aren’t over-paying.
Edmunds.com’s Price Promise gives buyers an up-front price as well. Buyers compare offers from various dealers without setting foot in a showroom.
CostcoAuto.com can be used to purchase cars at pre-arranged savings. Dealers line up to offer aggressive pricing to Costco members hassle-free, however, not all makes and models are available.
Carvana.com specializes in certified vehicles (used but must be accident free and with at least one year, 12k miles left on warranty). They can deliver cars to your door or you can pick up, and you can “test-own” the car with a 7 day no-questions-asked return policy.
We also found a great online resource with information and strategies for successful car buying at RealCarTips.com. Buyers who are fearless and skilled negotiators claim to get even better deals than what the services above can offer, although many people would happily pay extra to avoid bargaining completely.
Car Financing and Cash Flow
We recently did a podcast about car financing – check it out here: “Auto Financing” on the Prosperity Podcast.
Want more cash flow from your assets to pay for that car loan? We have excellent opportunities for investors interested in being private lenders. You’ll be contracted to earn at least 7%, low double digits for accredited investors. Contact us and inquire about our cash flow opportunities.
Car loans, mortgages, savings, investments… how does it all fit together? I offer a fee-based process called The Prosperity Pathway for those who would like to do a “deep dive” on the details of your finances. See here for more details, and contact us to schedule an appointment to explore further.