The Right Way To Buy A Car 2011

Car payments are a huge burden for many American families. It is not uncommon for a family to be paying as much as $800-$1,000/month on family cars. In “The Financial Physician: How to Cure Your Money Problems and Boost Your Financial Health” the longest chapter deals with the car buying process and how to buy right. Here is an exerpt:

WASTING MONEY ON A LIFETIME OF CARS

THE AILMENT

After our homes, cars are the costliest items that most of us buy. In the course of our lives, we will buy as many as 10 to 15 cars. So how we buy and finance our cars can make a huge difference in our financial health.

Years ago, most families had one car, which they kept until it died of old age. Today, families tend to have more than one car and will buy a new one every four or five years. And many people trade up more frequently.

The problem is that cars are both expensive and awful investments — in fact, they’re not really investments. They are de-investments, which is my term for assets that are guaranteed to decline in value. When you invest, you hope that the value of your investment will increase, but when you buy a car, you know that its value will steadily drop. Since the main purpose of a car is to provide transportation, to get you from point A to point B, it may be time to rethink how you purchase cars.

Cars are depreciating assets. Let’s say that you just bought an auto for $22,000. The salesman congratulated you for making such a great deal and as you drive home, you feel like a million bucks. Actually, you should be crying because you lost $4,400 the moment you left the lot.

New cars lose about 20% of their value as soon as you take ownership. Then they depreciate anywhere from 6% to 13% annually. So in the first year, you could lose $5,720 to $7,260. Ouch! The money you lost could have been saved or invested in assets that usually appreciate over time.

If you buy 10 cars during your life at an average cost of $25,000 each, you will lose $65,000 to $82,000 in first year depreciation alone.

Although the car manufacturers won’t like it, I’m going to make a bold, but true, statement:  Unless you’re wealthy, never buy a new car. It will damage your financial health.

TREATMENT   

 1. What to do

Buy a two or three year old vehicle that has just come off a lease. Over the years, the quality and reliability of cars have improved dramatically. Today’s cars are built well and can be expected to run for at least 150,000 to 200,000 miles when they’re properly maintained.

Many used cars, especially those less than four years old, have low mileage and look new. If you have them checked out mechanically, you won’t have to worry about buying someone else’s problem and you can expect years of safe, dependable service.

When you buy a used car, the original owner has absorbed the early depreciation. Instead of paying $25,000, you may pay $17,000, which is 32% less that the original owner paid. You also have to finance much less so your monthly payments, insurance and fees will be lower. If you decide to sell the car, you’ll get more of your money back because your car will have held more of its value. Over the course of your car-buying life, buying late-model used cars can save you lots of money.

When cars are returned to banks or finance companies at the end of leases, the lenders don’t want the cars. They want to sell them as quickly as possible to get their money back. So they work with dealers that specialize in selling off-lease vehicles for lenders.

These dealers are called lender liquidation dealers or liquidators. Every month, liquidators receive a large numbers of recently returned cars. The liquidator that I’ve bought cars from gets 1500 cars a month. It takes the best 250, put them in their showrooms and sells them to walk-ins. Then, they wholesale the rest at auto auctions. Since lenders are eager to sell, their liquidators frequently sell returned cars below book value.

Liquidators work with a number of banks and leasing companies and are paid a commission or a percentage of the sales price of the vehicles they sell. The balance of the sale proceeds they receive are turned over to the lenders.

My local liquidators’ showroom is filled with 150 to 200 cars so you always have a good selection from which to choose. They look new, have low mileage (most have between 10,000 and 30,000 miles), have been cleaned up and are certified as mechanically sound by the liquidator. Most cars are priced at three to five percent below book value. You can buy an extended warranty, finance your purchase through the liquidator or lease it or purchase it outright.

I’ve purchased six new-looking, dependable cars from a local liquidator. I bought each for less than book value and have always been well pleased. Buying from a liquidator involves little or no haggling because the cars are so well priced to begin with.