How to Buy a Car in a Tight Market, Without Overpaying

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Buying a car right now isn't easy. Between battery shortages, gas prices, and inflation buying a car seems like a complicated equation of pros and cons. On the front of every would-be car owner’s mind is one question: How to get a vehicle without overpaying. The good news is that there are ways to successfully navigate purchasing a car without overpaying in a time of high prices. Here's what to keep in mind for people planning on buying a vehicle soon:s

What to Know Before You Go Car Shopping

It’s no wonder that consumers feel stressed about purchasing a vehicle right now. New and used car prices have skyrocketed in the last few years. Manufacturers and dealers have cited everything from pandemic-related worker shortages to reduced battery supplies for the uptick in prices, but despite the improving economy, the vehicle price increase continues.

Today, the average new car will cost consumers just about $42,250, according to Kelly Blue Book. Used vehicles come in at an average cost of $25,000. Thus, consumers are feeling pressed to quickly jump on “good” deals they find before prices increase again.

While shopping for vehicles, speed can prove important, but it’s also critical to take the time to find the right car for your budget and needs. So, before jumping on the next best deal you see on the internet, remember to practice smart buying tactics first.

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Do These Three Things Before Shopping For Vehicles

1. Figure Out Your Budget and Credit Score Cars can get expensive in more ways than one. Before shopping for your next vehicle, plan out your monthly budget to see how much room you have for a car payment and car insurance. If you don’t know what car insurance will cost for a new vehicle, you can reach out to your agent for their best guess estimate. Additionally, you’ll want to find out what your credit score is before applying for vehicle loans. The higher your credit score, the better loan offers you’ll get. You can request a free credit score every year from all three credit bureaus: TransUnion, Equifax, and Experian. Alternatively, most banks have a credit score tool for their clients.

1. Narrow In On Vehicle Type It’s never a good idea to walk onto a sales lot without a vehicle in mind. Salespeople make their money based on the amount they sell, and a buyer without a goal in mind is easily navigated toward more expensive vehicles. Before shopping for a vehicle in person, narrow in on the type of vehicle you need. You don’t need to select the brand right away, but know whether you want a sedan, SUV, crossover, etc., before walking onto the sales lot.

1. Get Pre-Approved For A Loan If there is a single rule all buyers need to follow on this list, this is it. Do not walk onto a car sales lot without a pre-approval for a loan. Many buyers make the mistake of going only through the car dealership for their vehicle loan, when in fact, dealerships tend to increase the interest rate on vehicle loans for even clients with the best credit scores. Getting pre-approved for a vehicle loan allows buyers to shop around for the best interest rate, monthly payment, and loan term. It also allows buyers to check their credit reports and will get them the loan they need without the embarrassment of being turned away at the dealership for too low of a score.

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Is It Better to Buy New or Used?

The new or used vehicle debate has continually plagued car buyers. The answer depends solely on the buyer's needs, the market, and the vehicles available to the buyer. But, in general, there are pros and cons to buying both used and new vehicles.

Used Vehicles Pros :

1. Buying Used Vehicles Usually Saves You Money In general, used vehicles cost less than new vehicles. This rule, of course, does not apply to classic cars or special models. Used vehicles have typically already depreciated to the 70% value new cars reach after the first year post-purchase, meaning that what you buy is worth what you get.

1. Used Vehicles Tend To Come With Fewer Fees In terms of dealership fees and DMV licensing costs, used cars typically have less than comparable new cars. Both taxes and dealership fees typically correlate to vehicle cost, so the less expensive used car will have fewer fees than a more costly new one.

1. Certified Pre-Owned Vehicles Receive Inspections Provided you purchase your vehicle from a dealership and not from a private sale, used cars typically come with a certified pre-owned status these days. Certified pre-owned vehicles have received an inspection certifying the vehicle reaches manufacturer standards and has some guarantee against defects or damages. In essence, they certify that the car functions properly and safely.

1. Used Vehicles Have Lower Insurance Premiums Older and used vehicles don’t require gap insurance to cover the vehicle's depreciation cost. Thus, used cars have lower insurance premiums than newer cars.

1. Purchasing Used Vehicles Can Mean More Room For Bells and Whistles Purchasing a new car with all the latest bells and whistles can mean an extra $10,000 or more spent on the vehicle. Comparatively, purchasing a new car with accessories and add-ons will cost less, thanks to the vehicle’s already lower price tag.

Used Vehicles Cons :

1. Shorter Warranties or No Warranty Used vehicles typically have already run the course of their manufacturer warranty or soon will. Thus, if you want the vehicle protected, you’ll have to purchase an extended warranty.

1. Outdated Technology Automotive technology improves every year. Thus, a used vehicle that’s even a couple of years old will have outdated technology under the hood.

1. Less Fuel Efficiency In general, used vehicles tend to have reduced fuel efficiency compared to newer models.

1. Shorter Lifespan Used cars have already started running up miles. The average used vehicle has over 60,000 miles already on the odometer these days. Thus, used vehicles tend to have shorter lifespans than new ones.

New Vehicles Pros :

1. New Vehicles Come With Comprehensive Warranties Most new vehicles come with comprehensive manufacturer warranties to protect the buyer against any manufacturing errors. Additionally, most new vehicles come with dealership warranties or programs that cover oil changes and maintenance.

1. New Vehicles Have Better Fuel Efficiency New vehicles typically have better fuel efficiency than comparative used vehicles. Fuel efficiency remains a priority improvement for vehicle manufacturers and tends to improve in models every year.

1. New Vehicles Have the Latest Safety Technology New vehicles receive updated safety technology, whether it’s airbags, parking detection, or seatbelts. Unfortunately, used vehicles inherently have outdated technology.

1. New Vehicles Have The Latest Bells and Whistles The newer the vehicle, the new the accessories, technology, and other bells and whistles inside it. Whether it’s backup cameras, heated seats, self-parking, or Bluetooth, new vehicles have the latest rendition of these technologies.

1. New Vehicles Last Longer Than Used In general, new vehicles tend to last longer than used. Buyers purchase them with minimum mileage, typically under 1,000 miles from test drives. Thus, a new car is a blank slate without any damage or wear and tear.

New Vehicles Cons:

1. New Vehicles Depreciate Instantly Post-Purchase New vehicles depreciate up to 20% the second you drive them off the lot. This increases to 30% depreciation in the first year of car ownership.

1. New Vehicles Cost More A new vehicle, even a basic model, will cost more than a used vehicle.

1. New Vehicles Require Higher Insurance Premiums Because new vehicles depreciate almost instantly, insurance carriers require most new car owners to carry gap insurance in addition to auto insurance. Gap insurances cover the depreciation value in the case of an accident requiring vehicle replacement and can add hundreds of dollars to insurance premiums over the years.

1. New Cars Have Higher Tax Costs Because states charge vehicle tax and license plate fees based on the make, model, and year of a vehicle, newer cars tend to have higher tax costs.

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Follow The 1/10th Rule When Shopping For A Car.

Once you’ve determined if you’re shopping for new or used vehicles, find out what 10% of your gross income is. This general rule is known as the 1/10th Rule. Why does 10% matter? It’s simple: you should never spend more than 10% of your gross income on vehicle payments, including car insurance.

Spending more than 10% of your gross income on a vehicle can strain your budget and, in worst-case scenarios, result in missed payments or repossession of a vehicle.

Here’s how to determine what 10% of your gross income is:

Take your annual salary or income. Take your salary and multiply it by .10. The result is how much you can spend on a vehicle in a year. To figure out your monthly vehicle budget, divide the yearly amount by twelve.

For example:

Annual Salary: $50,000

Yearly Vehicle Budget: $50,000 x .10 = $5,000 (including insurance costs)

Monthly Vehicle Budget: $5,000 / 12 = $416.66 a month (including insurance costs)

Practice Patience When Shopping For A Vehicle

Shopping for a vehicle can seem like a race against the clock and against other buyers. However, buying the first vehicle you find on the lot can prove detrimental in the long run. It’s critical to practice patience when shopping for a vehicle.

The best way to practice patience while purchasing a vehicle is to 1) follow the three rules established at the beginning of this article (establishing a budget, researching vehicle type, and getting loan pre-approval) and 2) shop around at multiple dealers. Shopping around for the same vehicle can give you insight into how each dealership sweetens deals, charges fees, and expects their purchase process to go.

Search Outside the Box

When purchasing a vehicle, used or new, it pays to search outside the box. Don’t just look at the vehicles at the front of the dealership lot. Instead, search for cars that are collecting dust in the back corners. Sometimes you’ll find a new car tucked away in the back because no one wants a neon green car; other times, you’ll find a used car gem that’s gone ignored due to a small dent on its hood. When you shop for vehicles that have been ignored, you’ll typically get a better price on your purchase.

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What To Know About Car Buying and the Internet

These days, you can do just about everything from the internet, including purchasing a car. But, you still should follow smart buying practices, especially when buying online.

When purchasing a vehicle online, keep in mind that most internet buying options still require the buyer to come in person to the dealership for paperwork and pickup. Additionally, you don’t get as much of a chance to investigate the vehicle for yourself, so it pays to purchase a pre-purchase inspection from the dealer to certify the vehicle comes in the shape and quality cited online.

Finally, keep in mind that the impersonal nature of car buying over the internet changes how haggling and negotiations work when settling on a loan price for the car. On the one hand, not seeing a seller face to face can reduce anxiety for the buyer and help them negotiate on their terms; on the other hand, sales teams may be less likely to reduce fees or negotiate over the phone or chat.

What To Expect When Purchasing A Car

There are three critical components buyers should know of when purchasing a car: sales tactics, the paperwork process, and loan terms.

1. Sales Tactics The nature of car dealerships is pretty simple: they make money off selling cars. Therefore, you can expect car salespeople to strive for the highest price they can get on any vehicle, new or used. Watch out for sales tactics like:
   • Hard Selling: A persistent salesperson who uses pressure to instigate a sale.
   • Trade-In Manipulation: Some car dealerships will offer an automatic trade-in value that is undervalued, or they increase the cost of a new vehicle to accommodate for any trade-in value to make a better profit. Don’t automatically jump at trade-in offers; you should first get a third-party estimate of your trade-in’s worth and the value of your prospective vehicle.
   • The Salesman Who Has Your Back: If you’ve ever bought a car, chances are you’ve had the salesperson working with you say, “Let me talk to my manager and see if I can get a better deal.” They aren’t usually getting you a “better” deal; they’re just reducing their profit slightly while making the dealership seem helpful. Often, this tactic is used to charm buyers into add-ons or a more costly car.

1. Paperwork Buying a car is time-consuming, thanks in large part to the paperwork process. Buyers can streamline the process by bringing all the necessary paperwork and items with them to the dealership. Those documents include:
   • Drivers license.
   • Proof of income.
   • Title and registration for any trade-in.
   • Proof of insurance.
   • Proof of residency.

1. Loan Terms Understand when applying for a loan that the higher your downpayment and the shorter your loan term, the less interest you pay over time. If you finance your vehicle through the dealership, it’s not uncommon to see the salesperson pushing for a longer loan term as a “budget-saving” choice. However, dealerships will make extra money off a longer loan term, thanks to the interest. So, select a loan term that you can afford but will allow you to pay off sooner to avoid excess costs from interest.

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How To Plan Your Trade-In Wisely

Trading in your old vehicle can help reduce the cost of purchasing your next one, but you need to do it wisely to make the best bang for your buck. Here are some tips to ensure you use your trade-in to your advantage:

1. Don’t Immediately Tell The Salesperson You Have A Trade-In The moment you tell a salesperson you have a trade-in, they start calculating how to make more money elsewhere during the sale. Keep your trade-in on the back burner until you already have a quote on vehicle cost, then bring it up. This prevents dealers from tacking on additional costs or pointing you towards a more expensive vehicle to mitigate trade-in value.

1. Come To the Dealership With Your Trade-In Value Estimate Don’t come to the dealership and let them tell you what your car is worth - you should already know what it is worth before stepping on the lot. Refer to a third-party source like Kelly Blue Book to get an estimate on what your trade-in vehicle is worth before shopping for a replacement.

1. Shop Around for Trade-In Value If you don’t mind the extra legwork, consider shopping around for vehicle trade-ins before buying your next car. Reach out to several dealers and let them know you are considering trading in your vehicle - don’t give too many details on the car you want to buy to replace it. Instead, just ask for the trade-in value. Once you know the offers, you can take them to your selected dealer and try to haggle for a better trade-in price.

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How To Advantageously Use Your Credit Score

Credit scores can make or break a car loan. The better your credit score, the lower the interest rate on your loan. A lower interest rate translates to lower monthly payments and ultimately reduces the amount you pay throughout the loan.

So how do you use your credit score to your advantage? One, see if there’s a way to improve your credit score before applying for a car loan. Paying small sums of debt off a credit card is a great start to increasing your credit score. Two, apply for all your car loans in the same month. Car loans applied for in the same month typically count as a single inquiry on credit reports, thus reducing the impact on your score in the long run.

Recommended Vehicles for those Earning $55,000 or Less

The average recommended car payment varies from person to person based on salary and budget. However, these cars will suit most budgets for salaries of $55,000 or less. Keep in mind that you’ll want to keep your total car payments at around $450 or less, including insurance premiums, to maintain affordability

• Chevrolet Spark:
  The Chevrolet Spark is a base-model vehicle with an affordable MSRP and 33 mpg gas efficiency.
  • Average Cost - $15,000

• Nissan Versa
  The Nissan Versa is a subcompact car with great gas mileage (32 mpg), and new models carry keyless ignition, improved safety specs, and upgrade options.
  • Average Cost - $17,000

• Hyundai Accent
  The Hyundai Accent looks like a higher-end vehicle without the price tag. Its gas mileage sits at 33 mpg, and the car comes with excellent warranties from the manufacturer.
  • Average Cost - $18,500

• Subaru Impreza
  Subaru is a big name in vehicle safety. Their inexpensive Impreza comes with all the usual safety features, plus its all-wheel-drive and gas efficiency of 28 mpg.
  • Average Cost - $20,000

• Kia Soul
  The Kia Soul is an inexpensive crossover with more space than a car for toting around groceries and the family. It has decent mpg for a crossover at 29 mpg in the city and offers plenty of upgrades.
  • Average Cost - $21,000

Conclusion

Purchasing a vehicle doesn’t have to be a hassle, even in this economy. Just remember to use patience when shopping, and apply smart buying practices like those referenced in this article, and you’ll be in great shape when you roll up to the dealership.