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5 things you need to know before buying a new car

I can only imagine what the neighbors thought as they saw my wife dragging me, kicking and screaming, to her car. I wasn’t being forcefully transported to a recital, a trip to the in-laws or even a visit with the proctologist; it was worse, my wife was forcing me to go car shopping. While I was excited to see new cars, and all the cutting edge technology they now possess, the overwhelming dread of the aggressive sales person and bloody negotiations, which would soon unfold in cramped office (with obligatory novelty cup of spilled coffee on the desk) would soon be inevitable.

I collected myself and buckled in to the passenger’s seat and began mentally preparing for the battle that lay ahead. I thought to myself, as a lender, I see thousands of auto deals a year and I know the pitfalls most people make, how I can avoid them? Everything that occurs at the dealership is a well-orchestrated performance designed to lure you into a state of confusion and make poor decisions. I’ve assembled a short list of thoughts and actions that helped me through the process and should help you as well.   

1. All Businesses are entitled to make a profit. In order to put everything else in perspective the first thing we need to reconcile before we show up at a dealership is that they are a business and have the right to make a reasonable profit. The building, cars, employees, benefits, advertising, electric bill and so on all cost a significant amount of money. Most of which comes from the service department, but your purchase helps. You will need to come to grips with the reality that dealers cannot sell every car below invoice with no financing options or warranties and still remain in business. Think positively about the people you are helping to employ, almost like a charitable act.
2. You’re not doing one transaction. When you buy a car you’re actually completing a number of transactions which dealerships will want to express as one monthly payment. Think about it from this perspective, instead of going to the dealership for one stop shopping you would have to:
1. Sell your existing car
2. Buy your new (or new to you) vehicle.
3. Get a loan.
4. Decide if want/need additional GAP (Guaranteed Asset Protection) if you are financing more than the value or your new vehicle.
5. Decide on whether to get a service plan.
6. Decide what, if any, mechanical warranty you may want.
7. Decide what options you want added: floor mats, remote start, or maybe 3 foot tall rear spoiler to enhance your ability to drift?

Each one of these is an independent decision and each one of these is an opportunity for the dealership to make money, conversely it is an opportunity for you to lose money. Do not attempt to simplify this process by rolling all of these decisions into one monthly payment. Instead understand the cost associated with each decision and choose wisely.

3. Cash is not King. Believe it or not dealership don’t want you to cut a check from your account. With the internet, competition has forced auto dealers to make less money on every vehicle. In doing so we have forced dealerships to compensate by creating a system where they can make as much money (sometimes more) selling your loan to a lender. Unfortunately this may not always work in your favor. It works great if the dealership gets you the lowest interest rate available. But some dealers may choose the lender that pays them the most without regard for what it will cost you. The good thing is that as long as you don’t spend more than you should you can always look to refinance your auto loan with more favorable terms. If this is a concern for you get preapproved for an auto loan at a local institution that you trust. The other benefit is that most credit unions offer GAP and mechanical warranties for a better price than the dealership offers and they want to see you get a good deal as much as you want to get a good deal. 

• Figures Lie and Liars Figure. I’m not saying this to suggest that anyone is a liar but rather to illustrate that not all deals, or more specifically payments, are the same. Here are three plausible (simplified) scenarios: 

• • You know you are comfortable with a $400 a month payment. You have a great credit score and you just want to see what type of car you can buy.

• • • A conventional auto loan may be 60 months at 4% would mean you can afford about a $22,000 loan.

• • • A long term auto loan may be 84 months at 5% which would bump your borrowing power to $28,000

• • • An unscrupulous dealer may utilize this disparity to sell you a $22,000 car with an expensive warranty, service contract, and a now prudent but overpriced GAP coverage policy. In the end you drive off with the same car as you would have in scenario #1 but end up paying for additional coverages you may not need or want, financed for an additional 2 years at a cost of almost $9,000 more.  

All of this can occur if you lose sight of all the small pieces and allow the purchase to be “simplified” to a monthly payment.

• Sleep on it (test drive buyer’s remorse). Not literally, but you may have the sense that if you don’t take the deal right then that the car will be sold or the pricing will increase. Going home and thinking about all of the components of the transaction, and doing a little research on pricing can cause you from making some ill-informed decisions. The probability that the car you want will be there tomorrow is very high, don’t feel rushed to make such a big decision on a whim. Go to bed pretending as though you bought the vehicle and think of all the things you will now have consider:
  • Excise Tax Increase
  • Insurance Increase
  • Making your new payments
  • Fuel Costs
  • Routine Maintenance

If you wake up refreshed having thought of all those considerations (and more) and you don’t have (or believe you will have) buyer’s remorse, it may be a good sign. 

Courtney Fifield is the CEO/President at Athol Credit Union and has served thousands of members making home and auto financing decisions. Want to learn more about a specific topic? Drop us a line on Facebook!