When it comes to buying cars, people tend to splurge. A lot. The average new car price is $33,560. Car loans used to be 36-48 months, now 60-72 month loans are becoming more commonplace. Purchasing a car at this price and financing it for that long will cause significant financial stress. If you can “afford it,” you’ll be paying out $500/month for several years. If you can’t afford it, you’ll be in even worse shape. This guide will help you keep the price of a car as low as possible, and give you some tips along the way depending on your situation. Especially if you have a modest income and want to retire.
I know a lot about the buying process for new cars. Because I bought a new car with very little down, and financed it for 60 months. Oops. I was young and stupid. I did make a few very good decisions that saved a lot of money. I’ll help you learn from my mistakes so you can spend as little money as possible on your new car.
Some people don’t think that buying new is a good idea. If you’ve ever made your way to r/personanlfinance, they’ll tell you to stay away from new cars. Even if you make $200,000 per year, those people will tell you to buy a $3,000 10-year-old used Honda, bless their souls.
Set a Budget
The first thing you need to do is set a budget. For each person, this will be different. Since you’re buying new, you won’t find many cars for less than $14,000. Be realistic, pick a maximum price, and actually stick to it. I would recommend setting a budget less than the average new car price. There are plenty of cars that will cost you $25,000 or less. Such as my beauty, the Golf GTI.
As a rough estimate, these are my suggested maximum purchase prices based on your pre-tax salary:
- $50,000 salary –> $12,500 purchase price
- $75,000 salary –> $18,750 purchase price
- $100,000 salary –> $25,000 purchase price
- $150,000 salary –> $37,500 purchase price
I use a very simple formula: the purchase price of a new car shouldn’t exceed 25% of your pre-tax salary. For this calculation, I assume that you will put 20% down and finance the remaining 80% using a 36-48 month car loan. If you have enough cash saved up, you can opt for something more expensive, but don’t go crazy.
The reason I make this price suggestion is it will keep you out of debt. Something that pains me every month in the Zero Day Challenge is that I pay $475 for my car loan. I’m more than halfway there, but saving an extra $475 per month for 5 years would have put me in a much better financial position. Sure, on a $50,000 salary you can buy a $25,000 car, but those $450 per month payments will really start to suck, especially for 5 years.
If you make less than $50,000, don’t be too concerned. You can find solid used cars for $8,000 – $10,000 (think 2012 Honda Civic) and it will have a fairly minimal impact on your budget.
Research, Research, Research
The next thing you need to do is research different cars that you are interested in. And don’t start with luxury cars like BMW or Audi. Yes, they look nice, but they’re very expensive. They also play a few tricks on you. For example, the BMW 2 series starts at $33,150 which is less than the average new car price. But that doesn’t include destination fees or an automatic transmission. Plus, their base models don’t come with a lot of the tech that we’ve come accustomed to. Plus, you’ll be using synthetic oil ($100+ oil changes), premium gasoline, and inflated service costs.
When you start your research, figure out what type of car you need. Do you have a family of 4 and want an SUV? Maybe you want something a bit smaller like a hatchback. Sedans are popular, and so are subcompacts. Regardless of the type, look at what different companies offer. If you are trying to save money, you want to stick with Asian brands such as Honda, Toyota, Kia and Hyundai.
Their cars are typically a bit cheaper to buy, cheaper to maintain, and have very good reliability. People used to complain about the quality of American and German cars, but they have significantly closed the gap (these brands are bit more expensive as well). I try and push people to buy hatchbacks. The reason being they comfortably seat 5 people, often have 40 – 50 cubic feet of storage space when you fold down the rear seats, are very easy to park, and are fairly cheap. Plus I own one :).
Don’t Be Afraid to Test Drive
Anyway, now that you’ve picked what type of car, go to a few dealerships and test drive your options. Lets say that you are looking at hatchbacks. Go to Honda and check out the Fit and Civic Hatchback. Toyota offers the Yaris and the Corolla iM. Hyundai even offers a hatchback variant of the Elantra and Accent. Go on multiple test drives if you have to. It’s fun to do, and you really want to enjoy your car.
As an aside, you can turn test driving cars into a fun date. Head over to your nearest Mercedes dealership, and see how one of those cute convertibles drives. You won’t spend any money doing it, plus its very fun.
Cost Benefit Analysis
Okay, so now you have a list of cars that you’ve test driven. It’s time to pick which one is the right option. Write down all of the cars that you like, and write down their prices. If any of them are over your budget, cross them out. Out of all the remaining cars, start going over standard features, option features, and trims. This can get complicated, as companies like Honda have something like 6 different trims for their Civic.
Deciding between which car can be tough, so take your time. At some point, you will come to a decision that works.
Time to Save some Money
Who likes saving money? I like saving money! The next step is to go to TrueCar. If you’ve never heard about them, TrueCar is a service that will get you an extremely good price on a car. Let’s say that we decided on the Honda Civic Hatchback. We’ll head over to TrueCar and see how much money we can save.
When you go to their website, you enter the car you want, pick trim and options, and they give you an estimated price In this case, they predict that you can get the car for $20,116. Now, you can do a few things at this point. You can go to a dealership and ask for the True Car price, and they’ll probably give it to you. You’ll save money and almost always pay less than the MSRP.
But… we’re trying to save money here, so we can be sly. When you are on this page, you can opt to submit your personal information: name, phone number, and email address. If you do this and click submit, your phone will start ringing within a few minutes. Dealers will call you, asking you to come in.
What I did was tell them to email me, and I negotiated over email. I actually pit all of the dealers against each other, and got the lowest price possible. When I did this, I got a 2015 Golf GTI 4-door DSG for $24,400. The MSRP for this car was about $27,700, but it was really $28,520 because of their destination fee. By spending a week negotiating, I saved more than $4,000.
Plus, I didn’t need to talk to anybody. I negotiated via e-mail. After agreeing on a price, I walked into the dealership, signed a piece of paper and drove away with my car.
Now, there are ways to get even better prices. If you don’t know it, car dealerships get bonuses for moving a certain number of vehicles per month, quarter, and year. If you purchase your car at the end of the month, quarter, or year, you will get a better price. I bought my car at the end of November so they actually lowered the price by an extra $100 below what we negotiated, and threw in about $400 worth of extras if I signed that day.
Saving money when buying a car takes a little bit of planning, but definitely worth the extra time. But don’t be fooled: I may have saved $4,000, but I also spent $24,400. Plus about $2,000 in taxes, and $2,000 in interest. Ouch! I should have opted to fix my Mitsubishi Galant GTZ for $3,000 and saved an extra $25,000. With market gains, this would be worth closer to $35,000 if invested month over month.
Hopefully you learned a few useful pieces of information for the next time you buy a new car. Make sure to set a budget, do your research, and be a bit sneaky with your negotiation strategy.
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