Tuesday, February 24, 2015

Buying Used Cars, Part 1: Preplanning

By Michael Rentfro

I have Champagne taste and a beer budget. I like fancy things, but I don’t like to pay for it. This is a lifestyle for those that live on a budget. I would love to wear Lucky Brand jeans and Abercrombie sweatshirts and go to movies on opening weekend after having Sushi at a fantastic Japanese steak house. Unfortunately, the diminishing middle class has learned to live on a much tighter budget in recent years, so it means that my Lucky jeans and Abercrombie hoodies often come from higher-end second hand stores, my movies come from Netflix, and my Sushi is free when I fill up and purchase a car wash at the fancy gas station on the corner of 7th and Springhill.

Like many of us, we’ve had to learn to compromise our Champagne tastes because we can only afford cheap beer. This is especially evident when buying a car. I want to own brand new Aston Martin Quadroporte, but I want to pay for a battered and bruised 2004 Dodge Neon with one mismatched door and more miles on the clock than a retired JB Hunt Freightliner. See the connection?

Here’s the other thing: I like nice options on cars. I happen to think my wife’s rear deserves to be artificially warmed on a cold day via heated seats. I like my headlights HID, and my radio to come from space. I also enjoy knowing there are so many airbags in the car that an impact faster than 5 MPH will cause the car to instantly turn into bubble wrap making the car bounce gracefully down the street to a gentle stop. These are all options that add up quickly, which moves buying a new out of my price range. Since I like my toys, but prefer low (or no) payments, this means buying used.

In my lifetime, I estimate I have made the much-hated trip to shady used-car lots to purchase my next four-wheeled obsession no less than 20 times. I actually consider it a game now and even enjoy it. To me, buying a car is like the three seconds right before you sneeze. You get this sense of euphoria that turns to anticipation, then the uncomfortable and unstoppable feeling of losing total control of the situation, followed by the “ahhhh” moment when everything is over and you can continue on in total control of your life.

Buying a used car can be broken into three different phases. Phase one is preplanning, phase two is the actual act of shopping, and phase three is the actual negotiation and purchase. Following some simple steps during each of these three phases can help minimize the pain and suffering of purchasing a used car and possibly save you a few dollars in the process. In this submission, I’ll talk about phase one: Preplanning.

First of all, it’s important to keep things in perspective. While it is possible to get a good deal on a used car, that “unbelievable-I-talked-them-into-losing-money-because-my-dog-groomer’s-uncle’s-best-friend-knows-a-guy-who-has-a-car-lot” deals don’t exist. They just don’t. I’m not saying all car lots are out there to take your money by selling you a $500 car for $15,000, I’m simply saying that the car business is still a business and no business will ever intentionally lose money. Not for someone they know, or even someone they are related to. Not ever. This is especially important to consider when negotiating your deal in phase three. Why? Because no price listed on the window is ever the actual sale price. It doesn’t matter what the salesman says, it’s simply a starting point. (Note: Some manufacturers, such as Scion, and some dealership have a no-haggle policy. While you may not be able to haggle the sticker price, there are always extras a dealer can throw in to win your business. - Andy)

Always start with a price in mind. As I already stated, the price painted in the window of the car below the abnormally large helium balloon that’s partially blocked by the fan-powered “dancing noodle man” is never going to be the final purchase price of the vehicle, so only use it as a guideline. Have a strong idea of what you can afford as a payment, and under no circumstances, allow anything to make you deviate from what you know you can afford. Do this by taking a look at your monthly budget. If you can afford to set aside $300 a month comfortably for a car payment, set your top dollar at $250, then call your bank to talk loan terms. (I never, ever allow a car dealership to provide financing on a used car. I will provide details later when I discuss what happens at the dealership, but just know financing a used car at a dealership can cost you thousands more than financing through your bank.) Feel comfortable discussing these terms with your bank. They make their living based on your ability to repay the money you borrow, so they will be very honest with you about what they think you can afford, and I can tell you from experience, they are usually correct.

Once you have settled on a payment with your bank, ask them to calculate a purchase price. There are websites than can do this for you, but your bank can give you an exact number since they will have your exact interest rate. For the example I listed above, a five-year loan (pretty standard terms) with a 4% interest rate and payments of $257.83 equals a loan of $14,000, and you can get a lot of used car for $14,000. If you are trading in a vehicle, keep in mind that $14,000 is the difference in loans, not the final purchase price. What does this mean? Let me explain.

Let’s say you owe $10,000 on your trade in. You find the perfect used car and negotiate the purchase price to the $14,000 that fits perfectly in your budget. But wait, the dealership determines your trade in is valued at $8,000, not the $10,000 you owe. So now what? There are two options from here; you can either pay the dealership the $2,000 difference needed to pay off your current lien, or you can finance it into the new loan, assuming your bank will agree. Now, your brilliantly negotiated $14,000 sale price becomes a $16,000 difference. This has now caused your payment to go from the $257.83 you know you can afford, to $294.66 that you may, or may not be able to afford.

Now that you have been completely confused and utterly exhausted with the finance portion of preplanning, it’s time to research and compare the actual cars. Begin by making a list of options you consider non-negotiable. For example, my list would consist of four-doors, manual transmission, hatchback, easy-to-clean seating surface, a good stereo with Bluetooth (which I don’t currently have and it annoys me to no end …), and a backseat with ample room for my two young children. This is my shopping list any time I look for a car. It may sound like a lot, but it actually narrows the search drastically.

For comparison, type these non-negotiable options into any of the reputable “car finder” websites. Ebay Motors, Autotrader, and Cars.com are the big three that I use. Next, simply have a look at the results for research purposes. Be sure to broaden your search geographically to include several hundred miles. This will allow you to compare makes and models of vehicles that might not have a dealer network in your area or that you may not have thought of otherwise. For instance, there aren’t any Subaru dealers within 75 miles of where I live, yet there are several Impreza trim levels that have every single one of my non-negotiable options. Limiting the search geographically to the Autotrader default of 25 miles may exclude all Subarus from popping up in my search. Limiting your search geographically just might prevent you from spotting that perfect gem you’ve been dreaming of simply because it sits on a lot two miles out of your search zone.

After compiling a list of cars that meet all your requirements, begin comparing prices and options to get an idea of what options are most valuable. This will aid later in the negotiation process. For instance, if the salesman states “this one has navigation and that option cost $3,000,” then you can retort “OK, then I want that one without it for $3,000 less.” You may be surprised how often that works. Researching in this manner will also give you an idea of what you can actually find with the options you are looking for. For instance, can you find 2013 Toyota Corolla S with 15,000 miles and navigation that fits in your budget, or do you need to step down to a 2011 with 40,000 miles? Or still, can you drop the “S” package and find a 2014 with less than 10,000 miles that fits in your budget? Researching models with sale prices clearly posted (even though it’s never the actual sale price, remember?) will give you a clear list of years, makes, and models that will easily fit in your budget and make the overall purchase much easier when you move on to phase two, the dreaded shopping trip.

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