Financial Planning Stuff You Need to Know

Many Long & Associates clients are in the market to purchase a car and have asked me for car buying tips.  I put the following resources together to help save you money the next time your purchase a car.

New Cars

• Research Cars-  the best place I have found for overall car ratings is Consumer Reports Magazine.  You can access some content online at www.consumerreports.org.  Some content requires a pay subscription.  MSN also carries some Consumer Reports reviews at http://autos.msn.com (click on reviews).

• Research Prices- First you should research what is a reasonable price for the car your are interested in.  CarsDirect www.carsdirect.com will actually quote you a target price for a car without you having to put in any personal information or be contacted by a dealer. Edmunds www.edmunds.com will give you and estimate of what other people are paying for the car you want using their True Market Value (TMV).  You can also find out the real price the dealer paid for a car by ordering a New Car Price Report from Consumer Reports.  This includes, dealer incentives, and holdbacks that make the price paid by the dealer lower than the invoice price in many cases.

• Financing- Check your credit score at least six months before you plan to purchase the car.  If you have a low credit score <620, or an average credit score 620-719, try and raise it before you apply for credit.  You have a better chance of getting a low interest rate if your credit score is above 720.  Arrange your financing in advance.  The best financing option is to pay cash!  If you plan to get a loan arrange it ahead of time.  Credit Unions often have low rates on car loans.  If the dealer offers a great deal on financing later you can take advantage of it at that time, but you are not dependent on the dealer for financing.

• Test Drives- Once you have settled on a few models you are interested in it, test drive them.  DO NOT, negotiate price at this time.  Focus on the car itself, do you like the way it drives, are the controls easy for you to use, etc., etc.  After the test drive, thank the salesperson and be on your way.

• Negotiating the Price — When you have decided  which car you would like to purchase with which options, use the Consumer Reports, CarsDirect or Edmunds TMV as your starting point.  E-mail the fleet or internet buyer at several local dealerships with the following information.

Dear internet sales manger.  My name is (Your Name) and I am interest in purchasing a (XYZ car) in the next 10 days.  Here are the details of the car I am interested in (You can insert the info from Consumer Reports, CarsDirect or Edmunds here along with any color preference).

I plan to purchase the car from the dealer who offers me the lowest price on this car.  Consumer Reports Price Reports states that the dealer cost of this car is $X, CarsDirect target price is $Y and Edmunds TMV is $Z but I expect that you will be able to offer a lower price on this car.

I am a serious buyer and I wish only to be contacted by e-mail.  I am only interested in coming to the dealership to sign the papers.

Respectfully,

(Your Name)

• Trade In – If you are trading in your current car on a new one, save this negotiation for last.  To find out what your trade-in is worth use Edmunds or Kelly Blue Book www.kbb.com to establish a trade in value.  Make sure to be honest with yourself about your trade-ins condition.  You can also have your trade in appraised by CarMax www.carmax.com for free.  You can use that number as a base for your negotiations.

Used Cars

• Research. Use the same process as for new cars, although you will not be able to use CarsDirect which is only for new cars.

• Test Drives and Inspections — Test Drive any car you are think about purchasing.  Also make sure to have any car (even a Certified Used Car) inspected by a mechanic!!! Have the mechanic look for both current problems and problems that may occur in the next 1-2 years.  Make sure he/she checks the frame for damage as well, and looks in other hidden places for repairs.  Use any negative information to reject the car or negotiate a lower price.  Also run a CarFax www.carfax.com report on any car you are seriously considering.  It will tell if the car has had a salvage title (flood, totaled in a wreck).  A clean CarFax report does not put you in the clear since title reporting varies from state to state. Another reason to have a thorough inspection by your mechanic.

• Negotiating the price — Use the information from Edmunds or Kelly Blue Book,  or other pricing services to establish the retail value of the car. Use your inspection report to negotiate over the condition of the car and the ultimate price you are willing to pay.  You can also check out CarMax which offers used and new cars at a fixed hassle price.

I have some radical advice for buying your next car — PAY CASH FOR IT. I know, I know, nobody does that, who has $xx,xxx, sitting around, etc.  What most people don’t get is this:  If you can’t afford to pay cash then you really can’t afford to buy the car. Over a lifetime car purchases can significantly reduce your net worth.  When I work on plans for my clients, I find that a $25,000 car purchase every 7 years or often reduces their net worth by over a million dollars!  For those who lease cars and always have a payment it is even worse.

For most of us, if you cannot purchase a car for cash it means you cannot afford it. If you lease a car, it usually means you can’t really afford it.  We are now geared to the whole idea of monthly payments vs. the total cost of the car.  I recently gave a presentation where I asked the audience how many of them would buy a Mercedes Benz for $199 per month.  Almost every hand went up.  Then I said its $199 for 50 years, now no one wanted the deal.  Stretching out payments for something that decreases in value does not make it affordable. Long payment periods means that you will owe more on the car than its worth for most of the loan period.

Buying a car for cash has several benefits:

• You know what you can really afford.
• You will probably buy a less expensive car that you can afford.
• You will probably buy cars less frequently when you have to write a big check for one.
• You are never in debt and you earn money on the money you save for your car vs. pay interest on a car loan
• When you buy a car you can then start saving for the next one.

Next time:  How to purchase a car for a good price.