The federal government’s “Cash for Clunkers” plan may have ended, but low interest rates and dealer specials still serve as incentives for those interested in buying new or used vehicles. For many people, shopping for a car is an emotional choice based primarily on finding the right color and the hottest hubcaps. In today’s world, the kind of car we drive has become a status symbol, far exceeding its value as a practical mode of transportation.
Buying a car is one of the most expensive purchases families make. In most cases, it is second only to purchasing a home. However, making a major purchase based on status, color, style or monthly payments can be a costly mistake with long-term financial consequences. Before heading out to the showroom, savvy consumers will have a plan of action that offsets the potential for impulse buying.
Taking time to develop a well thought out plan helps ensure families make an informed choice that fits within their financial goals. Developing a plan of action presents an excellent opportunity to engage other family members in the process and increases the potential for making a good decision. Involving younger family members in researching options and alternatives can be a valuable learning experience for new or prospective drivers.
Following are several questions to answer when setting your plan.
- Why are you buying this vehicle? Are you planning to travel extensively or do you just need local transportation? Would a good used car be a better choice than a new one? Compact and mid-size vehicles tend to get better gas mileage around town than larger trucks, vans, SUVs or luxury cars. Also, compact and midsize cars tend to have lower insurance premiums and operating costs than flashy sports cars with even flashier wheels. And, used vehicles have less depreciation than new ones.
- Who will be using the vehicle? Will you be traveling alone, with children or others? Do you have a large family that needs transportation regularly? The vehicle’s size, number of doors, safety ratings and other similar features should be considered seriously and honestly.
- How much can you afford to spend? How much are the additional costs of insurance, gasoline and maintenance? Are all costs included in your monthly spending plan? You may want to use one of the online calculators to estimate your monthly payments; however, most calculators do not include costs other than the monthly payment. Most experts recommend monthly budget on total vehicle related expenses. A good resource to figure the true cost of car ownership is Edmunds.com (look for “True Cost to Own or TCO” on the home page).
- What features do you need? What equipment is necessary? What equipment is a luxury you can forego? The types of features and equipment needed will depend upon your answers to the previous questions. Remember, those add-ons add up quickly and will impact your monthly payments as well as the insurance premiums and other monthly expenses.
- What is your credit rating? Have you checked your credit report recently? The higher your credit score, the better your interest rate. And, lower interest rates reduce your monthly payments. Many dealers today offer pre-approved credit options online before you go shopping. However, those pre-approvals are generally like the calculators; they allow for monthly payments—not monthly insurance premiums or other expenses. Spending less than the preapproved amount gives you a cushion for those expenses.
- Do you really need the “newest,” “hottest” car, SUV, van or truck? Generally, those new trendy vehicles do not include special prices, rebates or other price incentives. If price is important, then you can make a better deal on another model.
- What do you know about available vehicles? What do you know about the dealer? It pays to ask around, to look at the various makes and models, to search online and to search publications such as Edmunds, Consumer Reports and other sources. You may also want to visit with friends or family members about their experiences with certain models or dealers to help you get the best deal for your situation.
Sue Lynn Sasser, PhD, is an associate professor of economics at the University of Central Oklahoma.
