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How to Buy a Car
The Great Mistake
The way we buy cars typically ends up being the great mistake of our lives. In fact, if you track most people you will find that they loose more money in buying cars than almost any other area of their life. There are a lot of emotional purchases that we make in life, but cars are probably the largest ticket item on the emotional scale. Because of this emotional aspect we have allowed cars to define our personality -- who we are. Because of this we make stupid mistakes.
In this Hub I would like to give a few simple tips to consider when you purchase your next vehicle. Hopefully, there will be some information that will help you not dwindle your wealth from emotional decisions.
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Start with the Basics
When you start considering your next purchase stop and think about the basics. The first of the basics is that car purchasing for many is an emotional purchase. Therefore, ask yourself, "Do I really need to buy a new car." If you don't "need" to, then why? Why not drive your current vehicle another year and save some money or at least put the six month rule into affect. I will explain it in just a moment.
If you feel that you "need" to purchase a vehicle now then make it a business transaction and not an emotional one. The car dealerships want you to smell that new car smell, drive the vehicle so you get an emotional attachment, and tease you with a bunch of "specials" that typically aren't so special.
Instead of being suckered into all of this do some research before you ever go to the car lot. Look at the various makes and models, find out what options are available on what models, find out the average price in your area, and do some searching on the internet to find out where the vehicle you want can be found. In other words, know exactly what you want before you ever step foot at the dealership. In reality, you are not going to be able to determine whether you like the way a car drives by driving it around the block so in reality you don't need to even take it for a test drive. If you really want to test drive a vehicle and see if you like it then go rent it for a couple of days and really drive it around.
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Do the Math
Too often we don't do the math to see what the vehicle is actually costing us. We hear "free financing" or "Rebate" and we get all crazy and think that we've got a good deal. If the make and model you are looking at is offering a $1,500 cash back that may be good or it may be bad. Remember, nothing is free -- even zero percent financing.
If you go into the dealership and their sits your car for $20,000.00 with a $1,500 cash back, then technically you are buying it for $18,500. If you can pay cash today, could you get it for $18,200? If so, that's more than the $1,500 cash back. What if they are offering zero percent financing, but you have to pay $20,000.00 but you could get it for $18,500 if you get a loan from the bank? Well, if the interest on the loan will be $900 then you would be better off taking it at the lower price and paying interest on the loan. Do the math and figure out which way is the best.
Should I Lease Or Buy?
I once heard Dave Ramsey say that leasing is for people who can't do math. I like that! The reason I like it is because it is true. I've basically said the same thing only I've said it this way, "A person only leases because they want to buy a car they can't afford."
If you run the numbers there is virtually NEVER a scenario where leasing will win out over purchasing. The dealerships make a lot more money if they lease it to you which is why they push it so hard.
But what about buying? Most people are not in a position to purchase the vehicle they want with cash therefore they finance. The problem with financing is that it allows people to purchase vehicles that they cannot afford. By financing their car for five to seven years they are able to get the payments low enough to buy a vehicle that is really beyond their capability.
My rule of thumb is this. Never buy a vehicle that you cannot afford to pay off within three years. Do you know what this will do? This will keep you in the price range of a vehicle that you can afford and it will also keep you right side up in the vehicle.
About two years ago I purchased a vehicle for my daughter it was a car that brand new cost about $13,000.00. Not an expensive car by any means, which means that it will also loose it's value pretty quickly. I bought it with zero down payment, but financed it so that I would pay it off within three years.
Fourteen months into our purchase the vehicle was totaled (thank God my daughter wasn't hurt at all). Most people in this situation would be out of a car with a large bill over their head, but not me. The insurance company paid off the loan and sent me a check for about $1,200.00. Buy right will keep you out of major financial hardships.
The Six Month Rule
Above I mentioned the six month rule. I think this is an excellent rule when purchasing a vehicle. This is how the six month rule works. Let's say you want to buy a car (remember this is an emotional decision) so you figure out what type of car you want and find out what the car will cost. For my example let's just say that it will cost $300.00 per month.
The way this rule works is that you make the $300 monthly payment for six months to yourself. You stick it in a saving account. This will do a couple of things. It moves you beyond the emotional state of purchasing the car because you are going to wait six months before you actually buy it. It also let's you get in the habit of making a $300 a month payment. Have you ever bought something, but then regretted it because of the payment you were stuck with?
This allows you to see if this is a payment that you can really afford to make. If you have trouble making the payment every month then you are not in a position to be purchasing this vehicle. Don't buy the vehicle until you have made six consecutive payments to yourself. If you miss a month you have to start over.
Next, you will have $1,800.00 in this example that you can use as a down payment on your purchase. This will help you keep the financing within the three year time limit that I've talked about.
In conclusion people loose a lot of money because they pay too much for their vehicles, finance them for too long a period of time, and drive them for too short of a period of time. Don't allow a vehicle to define who you are. You are more valuable than the vehicle so buy a car that is within your means.