Decide whether to buy new, used or lease: Study options before going car shopping
I think most people agree that buying a car isn’t the most fun experience. Yes, you will be getting a different or new vehicle, which can be exciting. The downside is the process of shopping for a car.
Last November, I had the “pleasure” of going through this process. Honestly, I went into it with my mind made up. I was going to buy the car I was leasing and be on my merry way. After three days and numerous calls to my sounding board (my parents and coworkers) I purchased a new car and sold my leased car.
What you need, want and can afford
Whether you are buying a new or used car or leasing a car, the decision often comes down to the type of car you need, the features you want and what you can afford.
The type of car you need varies from person to person, of course. Will you be moving heavy equipment, or do you need it for ski season in the Rockies? In my roommate’s case, they needed a bigger car to haul their dog around. Understanding what you need for your situation is the first question to ask yourself.
Next, what features do you want? I wanted safety features such as lane control and blind spot monitoring. Some people may value a sunroof or nice speakers. Decide whether the feature is a need or want, because features tend to drive up the price.
Lastly, it is important to know what you can afford. This may be the hardest thing to determine. For a lot of people, financing is how they afford the purchase. One rule of thumb is to keep your car payment to 10%-15% of your monthly income.
Once you have answered these three questions, you are better prepared to start the process of identifying the car.
Buying a new car
First, get pre-qualified for a loan before going to the dealership. There are plenty of lenders that offer free quotes that shouldn’t affect your credit score. This helps when comparing the dealership’s rate to the loan for which you got pre-qualified.
Second, a down payment, if you can afford one, will help reduce your monthly payments. Typically, for every $1,000 you put down, your monthly payment should be reduced by $20-$30 depending on the length of the loan. The dealership will likely offer you a warranty on the car. Make sure to ask what the warranty covers, as it can be very specific. This is where the dealership makes a lot of their money.
Third, don’t buy GAP insurance, which is optional insurance coverage offered through the dealership. It helps pay off your auto loan if your car is totaled or stolen and you owe more than the car is worth. Instead, talk to your insurance agent, as they may have less expensive options.
In this environment, it can be hard to negotiate because of the lack of inventory, but it never hurts to try.
Buying a used car
Buying a used car is a different ball game. Before buying the car, you should have it inspected by a reputable mechanic to ensure there aren’t any hidden problems. Also, ask for the VIN and run a free CARFAX report to learn the car’s history.
Again, don’t be afraid to negotiate.
Leasing a car
When leasing a car, it is important to calculate the underlying interest rate you will be charged. Then compare this to the interest rate that would be charged if you bought the car rather than leased it.
Also, consider how many miles you drive every month/year, because there are limits on how many miles you can put on the odometer over the lease term. The lower the annual mileage, the lower your payment will be.
Finally, having a higher residual value (price of the car at the end of the lease) is beneficial because it will keep your monthly payment lower.
Selling your leased car
When I sold my leased car, I didn’t want to spend a lot of time researching my options. However, a friend convinced me to do so anyway. This turned out to be good advice.
The dealership will give you an offer, which is a good starting point. Another option is to check CarMax. They offer free quotes online and a 30-minute inspection to confirm the offer.
You could also look at selling it on your own. This option might not be for everyone. Comparing offers can be time consuming, but it could yield you the best deal.
Be prepared
No matter what decision you make, I recommend going into the process prepared. Spending the time upfront could save you money in the long run.
Matthew Charles is a CERTIFIED FINANCIAL PLANNER professional and an active member of Financial Planning Association of Greater Kansas City. He serves as a Wealth Advisor for Mariner Wealth Advisors in Overland Park. The views expressed are for commentary purposes only and do not take into account any personal, financial, legal or tax considerations.
This story was originally published June 15, 2022 at 5:00 AM.