Are you thinking of buying a car? Here’s what the experts say you need to know

A customer shows a Toyota Prius 2022 at Lungo Toyota in El Monte, California on Wednesday, March 23, 2022.

Media News Group | Orange County Record via Getty Images

People spend a lot of money on their cars and trucks. In fact, about 16% of the average total US budget goes to transportation, including vehicle and fuel costs. This makes it the second largest spending after housing but before incidental expenses such as food, education and saving for retirement.

The scale of the expense can make car shopping stressful — especially for younger first-time buyers who tend to have less solid credit history and lower savings.

Today’s market is making it worse.

According to Kelley Blue Book, the average cost of a new vehicle (including cars, crossovers, vans, vans, and SUVs) exceeded $47,000 at the end of 2021—a more than 25% increase in just two years. Average used-car prices saw a more steep rise, rising 42% from less than $20,000 at the end of 2019 to over $28,000 two years later. These price increases exceed overall inflation over the same period. They are caused by the production slowdown caused by the pandemic, along with pent-up consumer demand and a global microchip shortage.

So, what’s the best way to buy your first car on the market today?

Where does the car buying process begin?

The first step for a new buyer is to determine the type of vehicle they need and their budget.

The choice takes some thought. The small sports car may work for one person or a couple, but not if they are planning to start a family. A big SUV might be great for camping and road-cruising with friends, but it’s not likely to be very fun when it’s time to refuel, pay for insurance, or find street parking.

“Think about your actual needs, how long your commute takes, how much you have to carry, and if you really enjoy driving and might want something sporty,” said Ronald Montoya, senior consumer advice editor and content strategist at Edmunds. “Avoid over buying – you can probably get a smaller car for most of your needs, and rent something bigger once or twice a year, when you really need it.”

With prices rising, shoppers also need to keep a close eye on their budget. “There’s no point in testing a car if it turns out you can’t afford it,” Tom MacBarland, who runs auto-buying service Automatch Consulting and writes about consumer and auto industry issues for Jalopnik, told Jalopnik.

Most experts advise spending no more than 20% of your home-earned wages on the car, including payments, insurance, and fuel or electricity. There are many calculators online to help consumers determine how much a car buyer can afford.

Choose the type of vehicle to buy

These days, nearly half of car shoppers choose crossovers — long vehicles that rely on passenger cars with an open back area (such as a station wagon or SUV) rather than a closed box. The crossover blends most of the driving efficiency and driving characteristics of a conventional vehicle with the few off-road capabilities and bad weather of an all-wheel drive SUV.

If you don’t need a long driving position and rarely travel in heavy snow, a conventional vehicle may be the best option, anyway. Whether in the form of sedans, coupes, convertibles or station wagons, cars tend to be lighter and have a lower center of gravity than crossovers, which helps with efficiency and control.

Conversely, a person who regularly tows or travels on poorly maintained dirt roads may lean toward a traditional SUV or pickup truck, which is generally built on heavy truck tires to withstand such abuse. Although most SUVs and pickups are gas hogs, there are a few efficient options, such as the hybrid version of the new Ford Maverick and diesel versions of the Ram 1500 and Chevrolet Tahoe. Furthermore, a range of electric options including the Ford F-150 Lightning will enter the market over the next year.

Anyone who doesn’t go off-road or pull a lot but does carry a lot, people or things should remember that minivans are still around. This much-overlooked segment of the market is ideal for large families and there is a range of front-wheel-drive and all-wheel-drive minivan options that can seat up to eight people in car-like comfort.

Finally, those considering acquiring an electric vehicle may need to plan a lengthy search. Battery-powered transportation may represent the future, but the vast majority of vehicles sold still use gasoline — electric vehicles made up just 3.4% of total vehicle sales in the fourth quarter of 2021, which is actually lower than diesel sales (4.6%, mostly pickup trucks). Father) ). Hybrid cars, which combine gas and electric power, made up another 7.5%. Manufacturers are trying to ramp up battery production, however, and some new electric vehicle purchases still qualify for $7,500 federal tax credits in addition to state and local subsidies.

Once a shopper has a specific type of vehicle in mind, they should read professional reviews (such as Car and Driver, Jalopnik, Edmunds) and research owner reviews to determine the particular models that interest them, then arrange for a test drive.

New or used?

For many years, it was a smart, financial move to buy a low-mileage used car—something that’s two or three years old and in good condition. They may lack the latest infotainment equipment and a full factory warranty, but they generally provide reliable transportation at a steep discount because cars will typically be down 20% the first year, and 10% annually for a few years after that.

However, the Covid pandemic has devalued consumption, and used car prices are growing faster than new car prices. With the price gap narrowing, it becomes more and more attractive to buy a new car because the cars are in better condition, plus they have a full warranty and can be financed at a lower rate.

Used Teslas have been doing well lately, as gas prices have soared, spurring more interest in electric vehicles and the economics of recharging versus filling. Popular electric cars now average $65,000 on the second-hand market, and are close to what they cost when new.

The best move for consumers is to look around, because paying roughly the same amount for a new use makes no sense.

Second-hand shoppers should also consider looking for a certified pre-owned vehicle, which most manufacturers offer through authorized dealers. CPOs – generally low mileage and vintage-style vehicles – are cleaned, inspected, and repaired if necessary. They offer a manufacturer-backed warranty in addition to the remainder of the original coverage, and some include extra perks like roadside assistance or trip insurance. CPO vehicles cost more than other used cars, but they can provide peace of mind.

How to pay for a car

Buying a car outright — often called car cash, although it’s more likely to involve a cashier’s check or credit card rather than a cash payment — allows consumers to avoid monthly payments and thousands of benefits. But it is not for everyone. Many people don’t have the savings, plus merchants make money out of financing and are less likely to negotiate a price for cash-paying buyers.

“Cash is usually your best option because it limits the amount you have to inject into dilapidated assets,” said Greg McBride, chief financial analyst at consumer finance site Bankrate.com. “But don’t deplete your emergency fund just to buy the car.”

Besides paying cash, shoppers can also resort to leasing or loans.

With leasing, consumers generally make lower monthly payments, but don’t own the car at the end of the term — usually three years — unless they pay a significant amount. “Leasing is often a vicious cycle of payments,” McBride said. “You basically rent the car and at the end of the lease you return the car and start over with a new car.”

Since renters do not own the car during the term of the lease, they may run into problems if they make modifications such as the audio system or engine upgrades. They also have to pay a penalty for excessive wear, terminate their lease early, or drive more than a specified amount (usually about 12,000 miles per year, although some new leases are less than 10,000).

Besides lowering the mileage allowance, rental providers have also been limiting the incentives they used to offer (such as cash rebates or subsidized interest rates). For these reasons, most people who are currently in the market to buy a car should look for loans if they cannot pay with cash. Loans usually cost less than leases—particularly for consumers who have kept vehicles for years. Also, those with loans don’t have to worry about mileage or wear, or pay a penalty for early termination. Most importantly, at the end of the loan term, the consumer owns the car. The term of the loan can be up to 84 months, or even longer. But most experts recommend sticking with shorter-term loans with lower interest to keep overall costs low.

Loans usually cost less than leases, especially for consumers who have kept vehicles for years. Since they own the car once the loan is paid off, there is no need to worry about mileage or wear, and there is no penalty for early termination. “We recommend making loans to most shoppers, offering at least 20% to keep monthly payments reasonable and avoid GAP insurance,” Montoya said.

GAP (Guaranteed Asset Protection Abbreviation) protects people who have a loan or car lease and owe more than its value. If their car is assembled or stolen, this complements regular insurance by paying the difference between the value of their car and what is owed.

MacParland said that anyone doing finance should understand their credit score to know where it is and then the retail lenders and leasing providers. “It is always wise to have the loan pre-approved before speaking to the merchant,” he said. “That way, you have some leverage for them to find a rate that matches or beats what you already have.”

Where to buy: dealers or direct?

Most sales of new and used cars are still made through dealerships. Using a dealer allows you to view and test multiple vehicles in one day, and gives you access to financing and even sometimes useful services like a free oil change or tire rotation. In many cases, the dealer will also accept the buyer’s old car when trading – with used car prices soaring, this can be a huge help.

Problems with dealers using often aggressive selling tactics and the tendency to add additional services to car sales at inflated prices. For example, etching a vehicle identification number (VIN) on a windshield is a useful practice that can deter theft and lower insurance rates, but a dealer may charge more than $300 for the work, which consumers can do with a $25 kit. To avoid paying exorbitant fees, Montoya said, it’s wise to ask about any dealer-proven options or profit margins. It’s a sellers’ market, and merchants may not waive any of the costs they incur, but the buyer can always move their business elsewhere.

Another option is to use a no-compromise agency, such as CarMax, Vroom, and Carvana. These companies can charge more than traditional dealerships, but generally they score positive reviews from consumers. Each promises stress-free shopping at a non-negotiable price and money-back guarantees, plus large, easy-to-find stocks. All of them will also deliver a new car straight to your door, in most cases. Unlike others, CarMax also provides physical locations where shoppers can view cars.

Of course, you don’t have to deal with merchants. Buying from a private seller is usually cheaper – there is little overhead to deal with and little chance of any inflated additional costs. Buying privately can also be less inconvenient for consumers who don’t mind dealing with their own paperwork, arranging their own financing, and paying any applicable government sales tax when registering the vehicle.

When do you buy a car?

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