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4 Steps to Take Before Buying a Car

Ready for some new wheels? Taking time to educate yourself on this major purchase can save you big bucks before you splurge on a new ride. Here are four consumer-savvy steps to take before buying a car.

Research the resale

A quick lesson in deprecation:  Simply put, when you buy a car, new or used, you are buying an asset that is guaranteed to lose value (also known as depreciation). Rates of loss vary by make and model, but you can generally assume a 15-20% depreciation of a car’s value each year you own it.

If you buy a new car, it depreciates even quicker. According to Kelley Blue Book, the true market value of a new car plunges from the retail price you paid to the dealer, to the wholesale price it’s actually worth, the second you leave the car lot — which can amount to thousands of dollars.

[pull_quote align=”left”]Buy a car with a high resale value that resists depreciation better than other cars.[/pull_quote]Depreciation will continue to be your greatest expense for the first five years after you buy a new car. But that doesn’t mean that a new car is always a bad value, or that a used car is a good buy. It all rests in buying a car with a high resale value that resists depreciation better than other cars.

Check out unbiased sources like Kelley Blue Book or Edmunds to understand the “book value” of different models, relative to prices in your market.  You can also research the “The Kelley Blue Book Best Resale Value Awards” (and past issues dating back several years) to understand what models are currently holding the most value. Researching Consumer Reports can also help you to understand the auto market conditions at any given time.

Keep in mind, however, that because resale value is dictated by market demand and consumer perception, it’s ever changing, and not intuitive. For example, according to Consumer Reports’ 2011 depreciation ratings, the Toyota Prius hybrid, Mini Cooper, and Scion xB,  all scored the top three spots for least depreciation over three years, beating out much pricier BMW, Lexus and Acura models, which have traditionally been lauded for high resale.

Committed for years

Barring major mechanical issues, you’ll get the most bang for your buck when you buy a car that will last you several years, and ideally, that you can own outright for as many years as possible, too.  While auto marketers (and your peers) do a wonderful job of creating tempting messages that make you think you “need” a new car every few years, a car is a major expense that you can actually remove from your monthly budget almost entirely — provided you’re willing to drive the same vehicle for several years.

Take the example of investing superstar Warren Buffet. With a 2012 net worth of $44 billion, the “Oracle of Omaha” could certainly afford a fleet of luxury vehicles, but as a shrewd investor, he knows what isn’t worth the financial loss. For years, Buffet reportedly drove a 2001 Lincoln Town Car (license plate: THRIFTY), that was eventually auctioned for charity in 2006. After that, he purchased a Cadillac DTS, which he continues to drive, six years later.

Envision your life in the next seven to 10 years before you settle on a vehicle that is only practical in the now. Choosing a car that suits your present and future will make a major impact on the money you’ll save, or lose, on a car purchase.

Insurance impact

Checking rates with your insurance provider to gauge the cost of insuring a different car model can save you hundreds of dollars a year on car insurance. But like depreciation, which cars dictate pricier premiums aren’t always what you assume.

According to a recent study by Insure.com, the cheapest new cars to insure tend to be large, sturdy minivans, SUVs, and trucks. Given that these vehicles are perceived as safer, the rates make sense — until you consider one popular car with a stellar resale value, among one of the more expensive to insure: the Honda Civic.

[pull_quote align=”left”]The Honda Civic has a stellar resale value but is more expensive to insure because it tends to be owned by younger drivers with no kids.[/pull_quote]It commands higher insurance rates, according to the site, because it tends to be owned by younger drivers with no kids. To an insurer, that equates to greater risk. The compact model means a greater probability of injury, and subsequent repair. It’s also one of the most stolen car models in America — likely due to the high resale value.

Devise a payment strategy

If you plan on financing a vehicle, shop around and remember that low monthly payments aren’t the only consideration. Edmunds senior consumer advice editor Phil Reed says that “most people aren’t aware of the interest rates’ impact to their monthly payment.”

Reed recommends Edmunds, Bankrate and Capital One Auto Finance as trustworthy, and free, online resources that allow comparison of lender offers and interest payments, and what contributes to the principal payment toward your car each month.

In today’s low interest rate environment, Reed also suggests taking advantage of the potential for 0% financing, saying that “many dealer finance programs are currently subsidized by auto manufacturers, making them a potentially competitive resource for auto financing programs.”

Provided you’ll be able to pay the loan off before the 0% rate ends and you have good credit and little debt, you can also strategize ways to make a little extra money. With a 0% loan, for example, depositing the sum total of the cash you would’ve spent buying a car outright, can earn you a little extra cash parked in an interest-bearing deposit account, as you make monthly payments.

What do you wish you had known before buying a car?

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About the author

Stephanie Taylor Christensen

Stephanie Taylor Christensen

Stephanie Taylor Christensen has more than a decade of experience in financial services marketing, and holds a Master of Science degree in Marketing. She writes on personal finance, small business and career news for clients like ForbesWoman, Real Simple, Mint, Intuit Small Business, Minyanville, and SheKnows. She is also the founder of “Wellness on Less” and “Om for Mom Prenatal Yoga” in Columbus, Ohio.

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