7 Car Buying Mistakes That Cost You Money
Buying a car is a complex process and often an emotional decision. Cost and reliability are usually the primary factors consumers consider when buying a car, but consumers also want a vehicle that expresses their personality and fits their lifestyle.
Car salespeople were voted the fourth least ethical professionals in the U.S., and even though they are notorious for high-pressure sales pitches, hidden fees and bait and switch tactics, car buyers continue to make poor car-buying decisions.
Investopedia contacted three experts from the AICPA's National CPA Financial Literacy Commission, an organization committed to increasing financial literacy and also one expert from Lightstream, the online lending division of SunTrust Bank. These experts compiled a list of seven car-buying mistakes that cost you more money than you should be paying for a vehicle. Read on to learn how to save money when buying a vehicle.#1- Failing to Do Your Homework
While car dealers practice their craft daily, most consumers only purchase one car every few years. And yet, many of them confidently walk into a car dealership without doing any homework. Sean Stein Smith, a New York-based CPA, tells Investopedia there's no room for ignorance when buying a car.
In an age when there is virtually unlimited information available online, for free, about vehicles and specific options, many people still do not do their research before walking into a dealership, says Smith. Since purchasing a car is usually a consumer's largest purchase, next to buying a home, Smith says it's well worth the time to conduct research beforehand.
It's a sentiment shared by Todd Nelson, business development officer at Lightstream. After you've decided on the make, model and year of the vehicle you want, research the MSRP (manufacturer's suggested retail price), and then look up the Kelley Blue Book Fair Purchase Price, so you'll know what's considered a reasonable amount, says Nelson.
In fact, consumers have the option of completing most of the car-buying steps online. According to David Almonte, a CPA in Providence, Rhode Island, Today you can even purchase a car online and take the awkwardness out of negotiating a car purchase: simply agree on a price online for a specific year, make, and model of a car and stop by the dealership to pick it up.
It's also important to know your credit score in advance, since this is a determining factor in how much interest you should be charged.#2 - Buying a New Car When a Used Car Would Do
While it's always more exciting to purchase a shiny, new vehicle, this may not always be the best option, especially since most cars depreciate as soon as they're driven off the car lot. Smith admits that buying a used car may carry more risk than purchasing a new vehicle, but he says that certified pre-owned programs have helped to standardize the process.
Certified pre-owned options, for virtually every car maker, include an inspection, refreshing/refurbishing, and an extension of the Powertrain warranty – and with interest rates still at historic lows, the financing for used cars is, in many cases, competitive with financing options for new vehicles, says Stein.#3 - Buying Unnecessary Extras
Negotiating the price of your car isn't the final step in the car-buying process. According to Almonte, that's only the tip of the iceberg, and when the salesman takes you into the back room to finalize the paperwork, it's a whole new ballgame. The dealer will offer you the opportunity to purchase/finance ‘extras,' which may include an extended warranty, premium sound system, premium tires and rims, sunroof, etc. And while an extra $10 a month may not seem like a lot of money, over the course of a 36-month or a five-year car loan, Almonte says that money can add up. He recommends seriously evaluating whether you really want those extras. If so, consider purchasing them separately at a later date.#4 - Thinking in Terms of Monthly Payments Instead of Price
Dealers often focus on monthly payments instead of the total cost of the car, since the former makes the vehicle sound more affordable. For example, even if the monthly payments work out the same between a 3-year and a 5-year auto loan payment plan, you will always end up paying more in interest with the longer loan duration, warns Smith. Although interest rates may be low, he says interest payments can add up, and by making more payments, you're tying up funds that you could be using to pay off other debts.
Almonte agrees, and says the first question dealers always ask is how much you are willing to pay a month, which is a trap. Don't show all of your cards, as the saying goes, says Almonte. Instead, he encourages consumers to hold off on telling the salesperson how much you're willing to pay each month.
In fact, Honolulu-based CPA Rodney Harano warns Investopedia readers against discussing the financing method when they're negotiating. Work on the price first, and then tell the salesperson how you intend to pay for it.#5 - Failing to Consider the Total Cost of Ownership
When you purchase a vehicle, you're paying more than just the purchase price. Before you buy, think about out-of-pocket expenses like fuel and insurance, plus depreciation. Those factors can mean a huge difference when it comes to overall expenditures, warns Nelson. He advises consumers to check Kelley Blue Book's 5-Year Cost to Own information, which includes costs for projected maintenance and repair, in addition to fuel and insurance fees.#6 - Failing to Do a Final Check of the Agreement Before Signing
Unfortunately, what you verbally agreed to may not be reflected in the final agreement. I have personally seen a dealership change the terms of the agreement that we verbally discussed five minutes prior, to see if they could get me to sign the paperwork, says Almonte. He advises consumers to check the agreement carefully and speak up when they find discrepancies, even if it means the dealership will have to print out all new paperwork. This is not the time to get embarrassed, says Almonte. He adds that this step is particularly important when consumers purchase a car online.#7 - Failing to Consult Family and Friends
Often, you can learn from someone else's mistakes and experiences. Ask your friends and family members about their car-buying encounters. And Harano also recommends asking friends if they know someone at the dealership. By knowing someone on the inside, he was lucky enough to get a 10% discount from a dealership that normally does not offer discounts.The Bottom Line
Buying a car is an expensive expenditure, and it is often an emotional decision. However, savvy consumers will conduct thorough research, decide in advance on a strategy, and refuse to be swayed by a slick sales pitch.