Recently Philip Reed helped a family friend buy her first car. It reminded him what an overwhelming and intimidating experience it can be for first-timers.
When Susan first called, she hadn’t decided whether to buy new or used or lease, and she had no idea what her credit score was. She didn’t know how to figure out what monthly payment she could afford.
All she knew was she needed wheels, fast.
Here are the steps they went through that eventually led to a good deal on her first new car.
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:
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:
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.
Takeaways for first-timers
- Let your budget lead you to the right car rather than stretching to buy a more expensive car. The new wears off much quicker than the payments.
- Apply for preapproved financing. You’ll know what you can afford, and it just might net you a better rate at the dealership.
- Use the new online tools for car shopping to avoid being pressured at a dealership.
- If negotiating scares you, shop at CarMax or one of the no-haggle online retailers such as Carvana, Shift or Vroom
Above all else, try not to be intimidated by what some people might view as figures of authority, such as the sales manager or the finance officer. Instead, be prepared with solid research and let the knowledge empower you.