March 2020
Barbara O’Neill, Ph.D., CFP®
Distinguished Professor and Extension Financial Management Specialist Emeritus
Rutgers Cooperative Extension
Kelly Blue Book reported an estimated cost of $37,401 for new light vehicles in the U.S. in 2019. According to Experian, the average new car loan amount is $32,119 and the average new car loan term is 69.17 months (almost six years!). According to AAA, every 12 months that a car loan is extended costs an owner nearly $1,000 in additional finance charges. AAA also reported a record average yearly cost of $9,282 ($773.50 per month) for vehicle ownership in 2019.
After a house and a four-year college education, a car is the largest purchase that many families make. With the statistics noted above, and car loan delinquencies currently at record highs, it pays to take the time to shop around for the best deal possible. Car buyers should weigh the pros and cons of new cars versus used, buying versus leasing, and various payment options.
Below are eight car-buying recommendations to consider:
- Do Some Math- Compare low-interest, even zero interest, financing and cash rebate deals using an online calculator. The better alternative will depend on two main factors: how much below market interest rates the lower rate dealer financing is and the repayment period of the loan.
- Do Some Research- Check out car pricing web sites such as edmunds.com and kbb.com before visiting dealer showrooms and review local auto advertisements. Find out the dealer invoice price or, better still, the dealer’s true cost after manufacturer bonuses and incentives.
- Keep Transactions Separate- Negotiate each part of the transaction- car purchase price, financing, and car trade-in price- one at a time. Otherwise, it is easier for a car dealer to get a higher markup by offsetting a low price in one area with a higher price in another. Settle on the new car price first and get it in writing. Then get prices for financing and a trade-in car, if applicable.
- Compare Dealer and Non-Dealer Prices- Compare the dealer trade-in price and loan interest rate with other alternatives (e.g., a private sale of your old car and a car loan made through a bank or credit union). Follow the “Rule of Three” and compare price information and terms from at least different vendors.
- Get Preapproved for a Car Loan- Take the time to shop for financing before you shop for a car. Like mortgage preapprovals, a car loan preapproval means that you are conditionally approved by a lender for a loan with a specific dollar limit, interest rate, and loan term, pending no negative changes in your credit history. Getting preapproved will make it easier to know what you can afford before you go car shopping.
- Consider a “New Used” Car- Compare the cost of a 2- to 3-year old “new used” car to a brand new car. Many late model used cars cost 30% to 40% less than new models because cars depreciate the most during the first 3 years of ownership. Some may even have the remainder of the original manufacturer’s warranty.
- Avoid Being “Upside Down”- Make a sufficient down payment and avoid long-term (5+ years) car loans so that a car is not worth less after depreciation than the amount of money owed on it. When a car loses value faster than the loan balance decreases, gap insurance is needed to cover the risk of owing the lienholder more than the value of a car if it is totaled or stolen.
- Beware of Privately Sold Used Cars- Tread carefully when buying a used car. Consumer Reports magazine recommends only buying used cars with a good history of reliability in private sales. This information can be found in its annual April car-buying issue. Ask the owner for available maintenance records and/or pay a mechanic to do a professional inspection.