Dream Series – That New Ride

If you are anywhere NEAR my generation, you’ve watched “The Price is Right” more than once.  Maybe not an entire episode, but at least segments of it.  Come on, who can’t resist Plinko?!?  A close second to that level of excitement was when the announcer (Rod Roddy, if you are my era), was asked what’s behind the curtain.  “Well, Bob, it’s…… A NEW CAR!”  And everybody went wild.  The really good ones were when the contestant playing the game flat out ended up on the floor in excitement.  That’s some good entertainment right there.

As long as the gameshow has been on the air (since 1972 in its current version – and yes, that’s older than me), I’ve never met anyone that’s actually been on the show, let alone won a new car.  And yet, I sure do know a lot of people who have gotten a new car.

Let’s be honest, we as Americans tend to love our cars.  Whether they are shiny and new or a well-worn rust bucket with tons of character, they are our babies.  They not only get us around, but can become an extension of our personality.  For example, find the biggest, loudest, most obnoxious pickup in your town and I’ll bet money that the owner is just as loud as their truck (don’t take offense, just playing….. sort of).

And with that level of attachment, getting a new or newer Carcar is a big deal.  In my homebuyer classes, a new car is probably the second most common goal after buying a house.  With that new purchase, there several different things to work through besides which color of interior you want.  So let’s take a look at a few of those to help you make a wise purchase, not just an exciting one.

New vs. Used – New is, well….. new.  It’s nice and shiny. No one else has spilled coffee or left a half-eaten grease bomb burger to swelter in the summer sun.  That car is yours and has only been yours.  It will probably need very little if any repair over the next couple of years and only minor maintenance.  But it also comes with a new-car price tag.  And as soon as you drive it past the curb of the car dealership, you’ve lost about 10% of the value because it’s no longer new.  That’s equal to the additional value you lose in the next 364 days.

A used car will not depreciate the same when you buy it because it’s already used.  It may need a little more frequent work and most definitely will not have that ‘new car’ smell.  But that ‘new car smell’ comes with a pretty heft price tag.  With the lower prices, if you can pay cash rather than taking a loan, you will save money not only on loan interest, but also being able to get by with less (see: cheaper) insurance requirements.

Buy vs. Lease – This is one I never used to really even debate.  Of course you don’t want to lease.  You make all those payments on top of putting down a deposit, have restrictions on things like how many miles you drive, and then have to give it back and get nothing in return.  And then I realized it’s a lot like renting an apartment – deposit, payments, restrictions, nothing back when you are done.  But a lot of people live in apartments.  I’ll be the first to admit that some people just should not be home owners.  And so it is with leasing a car as well.

With a lease, you get a new car every two years, they are always on warranty, and sometimes the dealership will even take care of oil changes for you.  That may be the right choice for you.  But I like building equity in my vehicles.  I often continue driving them after I’m done making payments on them.  And if I want to get in and just drive, I can without worrying about a mileage limit.  I can see both sides.

Take a little time to think through these topics.  There are other issues to decide on as well, like interior color.  But we just don’t have time to debate all of those.  These two topics are particularly important because they can really affect your budget.

Whatever you decide on for a new(er) vehicle, make sure you can afford to keep the vehicle.

  • Will it take regular gas, or are you paying for premium?changing tire
  • Will the mileage require filling the tank every 180 miles or 450 miles?
  • Does it have $100 or $400 tires on it?  (That’s for just one tire.)
  • Is a quick and cheap oil change OK or will it take 2.5 gallons of synthetic oil each time?

Once you know you can afford to keep the car, let’s talk about lending.  After all, the vast majority of car buyers will end up taking a loan out for the new vehicle.

KNOW YOUR APR!  Not just the interest rate, the APR combines the interest and fees associated with the loan to give you the true cost.  Fees can really hurt the checkbook even if the interest rate is low.  What’s a good APR?  Good question.  I’ve seen as low as 3% at my credit union.  That’s if you have good credit.  If you decided to go to the “Bad credit, No credit, No problem” car dealer, be ready to pay 18% or more.  By the way, that’s more expensive than putting your new vehicle on an average credit card.

If you are particularly protective of your credit score, you fear the hard inquiries.  After getting a loan through the dealer, I found 3 new hard inquiries on my credit report.  The dealer doesn’t actually lend you the money; they act as an agent for other lenders.  In order to get me the best deal, they put an application in with three different lenders on my behalf, giving me three hard inquiries.  The good news is that, according to FICO, these will only count as one hard inquiry because they all happened with a narrow time frame (14-45 days, depending on the scoring model).  So shop away and make sure you are getting the best deal for your situation.

As for other terms of the loan, we don’t recommend any auto loan longer than 5 years.  Remember – the longer you pay, the more you pay due to increased interest.  If it will take longer than 5 years to pay off, it’s probably more than you can really afford.  But if you want to keep it at a 5-year loan to make sure the minimum payments are and will be affordable, make sure there aren’t any pre-payment penalties in the terms of the loan.  This way, you can pay ahead (meaning less interest) and save some money for other fun things, like new tires.

So is a new vehicle one of your goalsAre you sure you are currently in a position to afford it?  If so, then by all means, enjoy that new car.

If you aren’t sure and aren’t sure where to start, the counselors at the Center for Financial Resources can help you figure it all out.  You can either call us at 605-444-7732 or schedule an appointment online.  Go ahead and enjoy your new vehicle.  Just make sure you can continue to enjoy it rather than it becoming an albatross in your life.

 

written by Breck Miller
images courtesy freedigitalphotos.net

 

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