Wednesday, January 23, 2013

Resources for buying a car

This post is a collection of resources that I've found to be useful for buying new cars.  Because I tend to research things endlessly, I figure I might as well put all of my findings in one place.  One significant issue that I have no experience with is leasing, so that is not addressed.

Let's begin with the first question.

How much car can I afford?

A question that immediately comes to mind when thinking of a car purchase is "how much can I afford?"  Some people think it's as simple as having sufficient savings to pay cash for the car, while others look at it as the ability to afford the monthly payment of financing the car.  Yet others will say "If you have to ask, then you can't afford it."  I see this as a personal decision because people do their financial planning differently (some prefer to be more conservative than others), but here are a couple of resources that I have found useful.

Bankrate.com has an article titled "How much car can you afford?", which states:
How much should you spend on a new car? Not more than 20 percent of monthly income, say experts. "This includes payments on all the cars you may own, whether you have one vehicle or six," says Karl Brauer, editor-in-chief at Edmunds.com. "And we're talking about your take-home pay, not your gross income."
They do have some exceptions to the rule which are stated in the article.  But it also leaves some open questions:
  • Does this rule assume that the car is being financed?  Or leased?
  • Does it include maintenance costs and the cost of insurance?
Another respected name in the financial planning world, Dave Ramsey, in response to a similar question, says:
The total value of all of your vehicles—things with a motor in them—should not be more than half of your annual income.
Again, there are some open questions:
  • Is he talking about pre-tax or post-tax income?
Which leads us to the second question.

What is the cost of owning and operating the car?

While purchase price is one factor, cars that are more expensive to purchase are often more expensive to maintain as well.  For this, we can get some guidance from Edmunds.com's True Cost to Own (TCO) calculator.
And now there is a new tool that reveals the hidden costs -- all the costs -- associated with buying, owning and operating a car over a five-year-period.
There are some issues with the calculator.
  • It assumes you're looking for ownership over 5 years.  If you own for less, it will probably cost more per year than the 5 year number.  Conversely, if you own for longer than 5 years, it will cost you less per year than the 5 year number.
  • It assumes that the car will be driven 15,000 miles a year.  Most will drive more or less than that number, and some, significantly so.
  • It assumes that the car is being financed, but there is no mention of the interest rate.  If purchasing with cash, one can get rid of the finance charge.  (But there is still some loss of income since the money would have been earning interest in a savings account.)
Yet, it is useful for getting a ballpark figure for what it would cost to own the car.  Even though some manufacturers offer free maintenance, they don't cover the cost of tires.  And tires on high-performance cars wear out pretty quickly and are more expensive to replace than tires for regular cars.

The tool also has the capability to price the car with options.

So let's take an example.  Running the calculator for a 2012 Honda Civic DX sedan with an automatic transmission, we find that the purchase price of the car is $16,924, but the total cost of ownership over a 5 year period, 15,000 miles a year is $37,113.














This gives an average annual ownership cost of $7,422.60.

Putting it all together

Now that we have the annual true cost of ownership of the car, we can decide what percentage of income we're willing to spend on the car (which in turn would depend on several factors such as the number of cars in the household, other debt/obligations, etc.) and decide whether or not we can afford it.

The purchase process

There are a couple of websites that will allow you to build the car and price it with options.  These sites also provide the "true market value" (TMV) which is the average price people in a certain area have paid for that car.  This can be useful for knowing what would be a reasonable price to pay for the car.
  • Edmunds: This site provides the ability to get quotes for the car and contact dealers that are willing to offer it at that price on your behalf.  From the homepage, click New Cars, scroll down and select a make, then select the year and the model, and that will take you to the page where you can price the car with options.  It provides the invoice price, MSRP, and TMV.
  • KBB: Offers a pricing tool that is similar to Edmunds.
  • Truecar: A number of banks, credit unions, and credit card companies, offer a car buying program where they provide one with a quote and contact participating dealers on one's behalf.  For example, the American Express program is available here.
  • AAA: Members can take advantage of AAA's car buying service.
The quotes and dealer contact are offered with no obligation, so it's always OK to walk away if a dealer doesn't honor the price that was quoted by the website.

Extended warranties

Most cars come with a bumper-to-bumper warranty for some period of time -- usually 3 yrs/36000 miles, while luxury cars come with a longer warranty of 4 yrs/50,0000 miles.  Whether or not an extended warranty makes sense depends on the reliability history of the brand/car.  I've always purchased extended warranties on my car.  Here are a few things that I have found helpful:
  • Wait until close to the expiration of original warranty.  It may be wasted money if one decides, for whatever reason, to get rid of the car while it's under the original warranty.
  • Buy only the extended warranty that is offered by the manufacturer of the vehicle.  Normally, the dealer tries to push other third-party extended warranties, but I stay away from those.
  • Pay attention to any exclusions.  The last warranty that I bought specifically excluded the radio/CD player and navigation.  My car didn't have navigation so the latter wasn't an issue, and fortunately I didn't have any issues with radio/CD player.
  • Shop around by calling several dealers.  Often, it is possible to buy these remotely by just sending in recently used key (many car keys contain information about the mileage of the vehicle), so there is no need to limit yourself to dealers that are close by.  Prices can vary quite significantly.  Usually, you'll be dealing with someone in the finance department at the dealership rather than a regular car salesperson.
Prepaid service plans

Some manufactures offer service plans for the car.  Sometimes the service plan is already included in the cost of the vehicle; e.g. as of this writing, all BMW come with prepaid service for 4 yrs/50,000 miles.  Other manufacturers may offer pre-paid service for an extra charge.  Some things to check on about these plans are:

  • Do they cover all wear and tear items (e.g. brakes and wiper blades) or do they just cover scheduled maintenance items.
  • How long is the plan valid for?
  • If the car comes with a prepaid service plan, can an extended service plan be purchased?
  • If the car comes with a prepaid service plan, wait until close to the expiration of original plan.  Otherwise, it may be wasted money if one decides, for whatever reason, to get rid of the car while it's under the original plan.
  • Shop around by calling several dealers.  Often, it is possible to buy these remotely by just sending in recently used key (many car keys contain information about the mileage of the vehicle), so there is no need to limit yourself to dealers that are close by.  Prices can vary quite significantly.  Usually, you'll be dealing with someone in the finance department at the dealership rather than a regular car salesperson.
Wheel and tire insurance

Some car manufacturers offer wheel and tire insurance plans.  Depending on the type of car, these could make sense.  Car with low profile tires, run flat tires, and large rims (18" or 19") are especially prone to being damaged by hitting potholes or curbs.  And they are usually very expensive to replace.

Other add ons

Many dealers try to sell other add ons such as paint protection or fabric protection.  Personally, I don't think these are worth it, especially if it's not something that is coming from the vehicle manufacturer.

A few more inputs for the decision process
Driving reviews from magazines are useful because they provide insights into some quirks that one might not otherwise notice during a test drive.

Related reading

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