Besides purchasing a house, buying a car is the most expensive purchase many people will make. Because buying a car is such a big decision, you need to be well informed. Not only do you need to know everything about the car your want, you also need to figure out how you are going to pay for it. That is why we put together this guide detailing the best ways to buy a car.
Current State of the Automotive Industry
Unfortunately for those looking to buy a new car, the prices of new and used cars have recently hit all time highs. According to Kelly Blue Book, new vehicles prices increased over $2,500 since June 2020. The estimated average transaction price for a light vehicle (i.e. cars, not SUVs or Trucks) was roughly $42,000.
There are several reasons why this has occurred. The reasons are mainly stemming from the COVID-19 pandemic’s interference with global supply chains. Another reason is because of an increase in the demand of new and used vehicles.
Because of the pandemic, if has been very difficult to manufacture vehicle components, as well as the vehicles themselves. Many plants and factories had their operations completely shut off to contain the spread of COVID. One specific segment that has been particularly problematic is semi-conductors or chips. There has been a global shortage which is slowing down the production of new cars. Because the supply is so low, dealers and marking up the MSRP of the cars on their lots. The amount of the markup can range from a thousand dollars to ten thousand dollars depending on the car.
Not only have the prices of new and used cars been affected by supply issues, but increased demand is also contributing to the rise in prices. Due to several stimulus payments made to Americans, people now have more disposable income. If their financial position wasn’t negatively impacted by the pandemic, they may have decided to use the funds for a new car.
These factors have been driving a lot of people to the used car market. Because it has been so difficult to find the right car on a dealer lot, and if someone did the price is so much higher than it should be, many people are looking for used cars instead. This is increasing the price of used cars as well. This is good news if you are trying to sell your used car. However, it is putting people that need a new ride if a very uncomfortable situation.
Our advice is that if you can wait to purchase a vehicle, then you should. Prices are on the decline and dealers have stopped marking up MSRP on new cars like they were peak pandemic.
Find the best vehicle for you.
Deciding on which vehicle is right for you can be a daunting task. There are tons of automotive manufactures out there meaning there are hundreds, if not thousands, of models to choose from. Before thinking about any car specifics, you should imagine where you want to see yourself in two years.
It is understandable that a lot can happen between then and now. If the type of car you currently want will suit your future lifestyle, then go for it. In the days where we get a new phone or laptop every couple of years, it is hard to imagine that the average person keeps their car for almost a decade.
New or used?
Another decision you will have to make is if you want a new car or a used car. Each comes with their own benefits and disadvantages. For instance, if you buy a new car you will be getting the newest safety technology to keep you and your family safe. Newer cars also may get slightly better fuel economy. On top of this, your car will be covered from any manufacturer defects. You can also breath easy knowing that nothing should go wrong for the first several years of car ownership. However, new cars depreciate much faster than a used car. This means the cost to own a new car will most likely be more than a used car.
Purchasing a used car has its benefits. First, you can save a ton of money because you will be purchasing a vehicle that has already depreciated. This means that you can get a 3 year old car that still has some new safety features for a fraction of the price of a brand new car. But you need to take into consideration the fact that the car might not come with any warranty. This means that if something happens and a mechanical part of the car breaks, you will be the one paying to get it fixed. Note – you can purchase car warranties for used cars which may be something you want to consider.
What are the ways to buy a car?
SUV or car, new or used. These are some of the factors you are going to have to consider. Once you know what car you want, you then have to figure out how you are going to pay for it. There are several different ways you can purchase the car.
Leasing is a very popular option when purchasing a car. A lease is a pretty simple concept, it is almost like you are renting out the car. With a lease, you pay a monthly amount to use the car. The lease terms are decided on by the dealer or leasing company. If you go with a lease, you are basically just paying the difference between what the car is worth new and what it will be worth when you are done using it. The good thing with leases is that they are transparent. You know what the car is worth, and what the leasing company thinks the car will be worth at the end of the lease (known as residual value). You will just pay the difference plus a small amount of interest known as the money factor.
The length of leases are pretty standard, the most popular ones being 36 months, 39 months, or 48 months. You also get a specified amount of miles you can drive the car per year. Depending on the make and model, these can rage anywhere form 8,000 miles per year on the low end, to upwards to 12,000 or 15,000 miles on the higher end.
If you put a ton of miles on your car every year, leasing may not be your best bet. If you decide to buy a used car, you will most likely not be able to lease it.
If you decide against leasing a new vehicle, and want to purchase either a new or used car outright, you are most likely going to finance it. This entails just paying a monthly sum of money until the car is completely paid off. You have more flexibility with financing then you do with leasing. Plus, there will not be any mileage restrictions.
If you decide to finance, you will need to find a lender. The car dealer can usually help you do this, but it will be beneficial for you to work with other lenders as well. Shop around financial institutions to see who can offer you the best interest rate. Credit unions are an excellent choice as they are not-for-profits and can offer lower interest rates.
Once you get preapproval, work with the dealer and lender on the terms. You can work on setting how much you want to pay a month, as well as the length of time it will take to pay off the car.
Pay in Cash
Another one of the ways to buy a car is with cash. Not many people have tens of thousands of dollars lying around which is one reason not a lot of people pay for a new or used car in cash. This is especially true considering the cost of a car these days. If you have the cash on hand just sitting in a savings or checking account, then buying a car with cash might be a viable option for you. Remember, do not use your emergency fund to buy a car.
Before you decide to pay for a car this way understand the opportunity cost of buying a car with cash. If the interest rate on your auto loan is 3%, and you know that the historical market returns are on average 6%, you may be leaving money on the table. You could move the cash to a conservative, short term investment account, and just withdrawn funds every month to pay off your car. The balance in your account will grow with the market and earn interest and dividends. Although you can make some return on the balance in your account, and ultimately pay less (because you are earning money from the balance) you are opening yourself up to investment risk.
Cash used to be the best way to buy a car. In many instances, a dealer or seller would offer you a discount paying in cash. However, those days are behind us. A lot of dealers work with financial institutions and get a kick back if they send a loan to that bank or credit union. So, it is actually better for the dealer if you take out a loan or finance the car. Either way, they are going to be getting the full amount of money for the vehicle.
Best Ways to Buy a Car – Summary
Buying a car can be a very stressful task. There is so many factors to consider such as the car make and model, as well as how you are going to pay for it. It isn’t helping that the automotive market has been going through some issues of its own that last year or so.
Before you buy a car, make sure you conduct your due diligence. Test drive as many cars as you can for as long as possible. Read reviews and watch videos on the car. Also, shop around for a loan to make sure you are getting the best rate. You may also want to look into some of the online car dealers like CarMax and Carvana. They offer excellent cars that can come with a warranty, and you can even return your car after a certain amount of time with no strings attached.
With all of this information, you should now be able to make a well informed decision regarding what car to purchase. Good luck!
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