I chose today’s financial news topic because it is my opinion that most people struggle with this area of their budget/financing. Today, we are talking about buying a car, and the mistakes people make when buying them. There are 2 articles, with the first article covering the “top 5″ biggest mistakes, and the 2nd article covering another big mistake that I thought the 1st article should have included.
Today’s articles are Top 5 Biggest Mistakes When Buying a Car By: Jeremy Vohwinkle and Explain How A Car Lease Works By: Dave Ramsey
Brief summary: The 1st article cover 5 of the biggest car mistakes out there, and the 2nd article cover the one that article left out, the car lease.
Here are the “Top 6″ biggest mistakes when buying a car:
1. Thinking in terms of your monthly payment: I honestly don’t know why people do this. I guess they think they will never have ANYTHING paid off! If you go into the car buying process focused only on what you can pay each month, it will cost you in the end. The car dealer can do a lot of adjusting of the numbers to make the car you want (or a least a close second choice) fit your budget. They can change the interest rate, giving you a longer term loan, and give you “extra” on your trade in, which is usually added back into the price of the car somewhere. Higher interest rates and longer terms automatically raise the cost of the car, but it’s raised over time, so most people don’t notice. Don’t think in terms of monthly payments! Now, if you must finance your car/s, keep in mind that the total *value* of all your vehicles should not exceed 50% of your annual GROSS income. I strongly suggest saving up and paying cash for a car!
2. Buying new versus used: Vehicles are one of the dumbest things to “invest” your money in, since they depreciate rapidly, and investments are supposed to appreciate over time! All those people you see on the road in their fancy luxury and sports cars shouldn’t even be driving them unless they paid cash for them! New cars typically decrease in value by 25%-40% in the first two years…put another way, the same thing that happened to a lot of peoples’ 401K’s over the last couple of years is what happens EVERY time you buy a new car, and for some reason, no onw seems to be bothered by this. A $25,000 vehicle, depreciated 40% = $10,000…over 2 years, that’s like throwing $100 bill out the window of that new car every week! Your best option is to purchase a 2-3 year old car with low miles and a reputation for dependability.
3. Choosing the wrong vehicle: Another thing that baffles me! Why would a single person with no children need an SUV or a Dually pick up truck with a 5000lb towing capacity? Don’t buy a vehicle that doesn’t meet your specific needs. If you’re single and only need a car to get you back and forth from your job, think about a compact car. Married with children? Perhaps a larger sedan or an SUV is more to your needs. Live on a farm or have a boat? Then a truck might be more suited to your lifestyle. Just remember this when choosing a car: Sure, it looks nice, but nicer vehicles always cost top dollar!
4. Forgetting about the other costs of a vehicle: When you buy a new vehicle, you don’t just buy the car. You buy the additional costs in gas, insurance and car parts. So you want the sweet looking foreign car? Well, have fun buying the parts to fix it when it breaks down, because they aren’t cheap…and don’t kid yourself, because ALL vehicles break down at some point in time! Think you want that 2 door coupe because it looks sporty? Well, it does, and the insurance company knows it does, and will charge you more for having it. Want the type of SUV that you see the army men driving? Well, large SUV’s can get as low as 10-15 miles a gallon, so you’d better have the cash to pay your weekly gas bill! Overall, these costs can add up to hundreds or thousands of dollars over the life of the car! Just something to think about.
5. Putting no money down: I don’t even know how this was allowed to become SOP, or the norm. Why anyone would think that going to a car lot and just signing your name for a car was smart boggles the brain. They depreciate, remember? So you are immediately “upside-down” (owe more than the car is worth) in the car. This becomes a real problem if you sell the car before your loan is paid off, which most people do these days, since they don’t want an “old” car. You could not turn around 1 week after you bought the car and get what you paid for it! So, why then would you not put some money down, and purchase a car that is within your means?
6. The car lease: The car lease is probably the worst way to obtain a new car for most people. The rules and regulations in the lease agreement (AKA contract) are so strict, that most people aren’t able to stay within the guidelines. And let’s think about why some people lease in the first place…because they couldn’t afford the car they wanted by purchasing it. So, they know they can’t afford it, but they have to have it anyway, by any means necessary. Sounds like a recipe for disaster. Leasing a car is basically like renting a car. You make a monthly payment and at the end of the lease, you give it back. If you want to buy the car at that point, you have to pay what the dealer estimates the car is worth at the BEGINNING of the lease. If you pay $300 a month for 60 months, you pay $18,000 over the course of the lease. When they get the car back, you will have paid them more than the car has depreciated during that time period, because otherwise the dealers would lose money, and they aren’t going to give you a lease that makes them lose money. And don’t forget, you are taking care of the car like you owned it during that time. If you don’t, it breaks the lease agreement (contract) and they will charge you extra for that when you go to turn it in. Now, yo might be tempted to think that extra is a couple hundred dollars, but it can be thousands! So you go give back the car, and to give it back you have to pay $2,000 dollars! Nice, huh? As Dave Ramsey put it in the original article, don’t get “fleeced” (i.e. have the wool pulled over your eyes) with a lease!
There you have it…the “top 6″ mistakes people make when buying a car. Instead of falling into the pitfalls above, when you go to a dealership to buy a car, you should:
- Think about the total cost of the car, and be sure if you finance you don’t exceed 50% of your gross pay for all vehicles
- Buy used
- Choose a vehicle that suits your marital/parental status, work life and home life…not your social status
- Remember all the costs, like gas, insurance and scheduled/unexpected maintenance
- Put some money down!
- Don’t get a lease and don’t buy more car than you can afford
Tags: Car buying, Car tips, Lease, New car, Used car
