Set your budget

Luckily, Susan had a full-time job with a good salary. Unfortunately, she lived in Los Angeles, where the cost of rent is through the roof.

Phillip told her the car payment and all car expenses (insurance, registration, etc.) should total no more than 20% of her take-home pay.

She worked the numbers and came up with a monthly payment of $350 and said she had $5,000 for a downpayment.

Get preapproved before you shop

The hardest thing to do was to keep Susan from just heading to a dealership and throwing herself at their mercy. Dealerships seem to have a gravitational pull because, after all, that’s where the cars are.

But Phillip kept telling her, as a first-time car buyer – and particularly during a pandemic – she should do as much as possible remotely. That would mean using email, text and phone calls to shop and haggle with the dealer.

But the next step, after budgeting, was to apply for a loan before going car shopping. Here’s why:

• You find out what interest rate you qualify for
• It unearths any problems on your credit report
• Preapproval puts you in a stronger position to negotiate at the dealership because you’re not worried about financing

The first lender turned Susan down. But they give her a copy of her credit report along with her credit score. With this knowledge, she chose a lender that worked with mid-tier customers, and she asked for a smaller loan amount.

Decide on new, used or leased

Since Susan planned to move into a new apartment soon, she needed her savings for a security deposit. This made leasing attractive to her. Here are a few other things she liked about leasing:

• Leasing allows you to drive a more expensive car with lower monthly payments
• A leased car is under an included factory warranty for three years
• At the end of the lease, she had the option to buy the car at a predetermined price

On the downside, Phillip reminded her with leasing:

• Mileage is often limited to a total of 36,000 miles over three years, but can be as low as 22,500 miles
• She could be dinged for excess wear and tear at the end of the lease
• After three years of making payments, she would have to either lease again or buy the car

Leasing works for people who want to be driving a new car every three years. But in the long run, buying a good used car will save money.

Choose your car

Susan had no idea what she wanted other than a reliable, inexpensive car.

Phillip suggested she use a car finder tool, such as the ones on Edmunds.com or Kelley Blue Book, found at KBB.com, and filter it for her preferences. Because she had strong environmental concerns and wanted to reduce emissions and save gas, she reviewed all the hybrids on the market and eventually chose the Toyota Prius.

This kind of basic research is useful because it puts guardrails around your search. So… if space for the dog is a priority, you won't be distracted by a Miata.

Make your best deal

Susan ignored Phillips advice about shopping remotely and, the next thing he knew, she was texting him from a local Toyota dealership. She had seen a used Prius advertised for $18,795, a fair price according to Kelley Blue Book. However, when she got there, the salesperson told her the advertised price didn’t include “a whole lot of extras” and the true price was $28,000!

He told her this proved this dealership was untrustworthy and recommended she leave. However, she soon texted me a photo of a deal sheet for a lease on a new Prius. It was $1,500 in drive-off fees with a monthly payment of $298 and a total of 36,000 miles. Phillip told her to make sure sales tax and other fees were included in this monthly payment.

Keep your deal clean

Phillip told Susan the Prius deal looked good as long as she said no to any extras in the finance and insurance office. He warned her she might be pressured to buy a lease protection plan – insurance against excess wear and tear – and wheel and tire warranties.

These are high profit items for the dealership consumers rarely use.