If you must buy a new car, bone up before you walk on that shiny dealership floor. If you remember nothing else, keep these rules in mind.
By Des Toups
We wouldn't be doing our job unless we told you that buying a new car, especially when you're newly arrived in the workforce, is a very bad idea.
You're considered a bad credit risk and an even worse insurance risk. Payments, insurance, registration, maintenance and gas will consume a disproportionately large amount of your paycheck. You'll be car-poor, condemned to Friday-night cruising because you haven't got the cash for a date. You'll be eating cat food when you're 70 because you skipped the 401(k) to pay for new rims.
So please, ride the bus. Keep your old car. Buy a better used car. Flush dollar bills down the toilet until the urge passes. Just don't buy a brand-new car.
But you're 22, and what do we know?
Turns out, we know enough to help you buy a brand-new car so that you don't come to regret it . . . much. We'll keep things simple, recognizing that you might not do your clearest thinking on the showroom floor. You'll find lots more specific advice in the links at left, but these are the basics. If you forget all else, remember these five rules.
Don't trade your old car, sell it
Chances are you're still behind the wheel of whatever the 'rents packed you off to college in, one you kept running by working counter shifts at the coffee house. Chances are it's had indifferent maintenance and more than a few scrapes with curbs, posts and other beaters.
To a dealer, it's next to worthless, though he may tell you otherwise. Any car not good enough for a new-car dealer's used-car lot goes straight to auction, where it will sell for a figure so low it would shock you. But another dealer, lower in the pecking order, will snap it up, mark the price up a thousand or two and make a nice profit that could have been part of your down payment.
Even with nicer cars, you're leaving money on the table by letting the dealer have your car to sell. And without a trade, buying a new car is a simple, how-much-here's-a-check transaction, rather than financial three-card monte with you as the patsy.
Arrange financing before you go to a dealer
This is more about protecting your choices than anything else. Check your credit score and get approved for a bank or credit union loan first; that way, when the red mist descends at the dealership, you won't feel compelled to take what the dealer offers. You can negotiate harder if you know your credit passes muster. If the dealer can do better than your bank, fine. But typically those 0% deals go to buyers with long, stellar credit histories and a home of their own, not to people like you with short credit histories.
If your credit is marginal (a credit score below 620 or so), stick with a bank. Auto dealers can work any number of tricks with financing -- seen the signs that read "We Finance Anybody"? -- but most of them are hard to understand and all of them are expensive. If a bank won't make you a car loan, you really, really should not be buying a car. If your credit requires a co-signer, fix your credit before you try to buy a car. Please.
Unless you enter a dealership intending to lease rather than buy, don't switch horses midstream. Leasing requires its own homework, and it's rarely a good deal for first-time buyers.
Talk to your insurance agent
Finding out that your insurance payment can be larger than your car payment is quite a shock -- and it happens. Generally, the kinds of cars young people like are the ones insurers don't. Think four doors and no turbocharger. And even if the rates aren't outrageous, consider how expensive a car might be to fix. Those rear-mounted spare tires on sport-utility vehicles look butch, but they tend to take the brunt of parking-lot impacts rather than the bumper, crushing into the rear hatch and turning a scrape into a major repair.
If you're financing, you won't leave the dealership without insurance coverage. Better to arrange it first, with no surprises, than to be forced to take what's available at 5:00 on a Saturday afternoon.
Have a real down payment
You need a cash down payment of least 20%, excluding any rebates, or otherwise you're "upside down" from Day 1. Here's why:
Rebates are manufacturers' way of cutting the price without cutting the sticker. A new car with an MSRP of $17,000 and a rebate of $2,000 is in fact worth $15,000 on the pitiless open market. Using only your rebate effectively means you have no equity in the car -- and once the key is turned and the depreciation clock starts ticking, you're in over your head.
Many manufacturers offer additional small rebates for first-time buyers and recent college graduates. Those count, because everybody doesn't get them.
Say no to the finance guy
You'll have to visit, just to sign the paperwork. It's his job to sell you a few extras along the way. Say, "Just the car, please." No Scotchgard (you can buy a can for five bucks at Wal-Mart), no undercoating (you won't keep this baby long enough for it to rust), no credit life insurance (you have no spouse and kids to protect). Say no to an extended warranty. Standard warranties typically run three years -- and lucky you, warranties on cheaper cars are getting longer. You have until the standard warranty expires to opt for the pricey extended warranties. You should know by then whether or not you'll need one.
Don't pay for window etching (an anti-theft measure you can have done far more cheaply elsewhere) or a dealer-added alarm (ditto). Don't pay a separate charge for dealer prep.
The finance officer will also explain the fees tacked onto the price of the car. Expect to pay sales tax, registration and licensing fees, a destination charge and a small documentation fee, for filing all the paperwork. Don't pay an additional dealer markup fee (the "second sticker" you sometimes see on the car's window). Don't pay administration, delivery and handling, flooring or promotions fees.
These wallet-gouging fees and extras may be printed on the buyer's order form, with the amounts handily filled in, but that doesn't make them mandatory.
You're probably itching by then to get behind the wheel, but make sure you carefully read what's in front of you. If you're financing through the dealer, check the interest rate and number of payments to make sure they match your expectations. Make sure your down payment is recorded and any rebates reflected.
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