Money Book for the Young, Fabulous & Broke: Big Ticket Purchase: Car
April 2, 2008, 9:22 pm
Filed under: Books, Money Basics | Tags: ,

This is the eighth installment of my review of Suze Orman’s The Money Book for the Young, Fabulous & Broke. The previous installment, Investing Made Easy, covered investment basics.

Buying a car is the worst investment you could possibly make. Orman recommends you don’t even consider it to be an investment as it is a depreciating asset and will only lose value over time.

When considering getting a car, you have the option of leasing or buying. When you lease a car, you essentially borrow a brand new car for three years, then at the end of those three years, you’re faced with 3 options:
-Buy the car at a prenegotiated price (which is usually higher than the actual value)
-Walk away and look into buying another car
-Lease another car (most people choose this option)

Leasing car after car causes you to always have to cough up the money for a monthly payment. Break this cycle, or don’t even start it, by taking out a loan to buy a car instead. When you pay off your loan, you will own the car outright. No more payments to make. An even better idea is to keep the car longer and don’t go out and buy another one as soon as you pay off your loan. This way, you won’t have any payments to make for a good couple of years.

As far as loans go, the car dealer won’t necessarily give you the best deal on a car loan. Research and know your options before going to the dealership.

Orman is adamant about saying no to new cars (they lose 20% of their value the minute they get driven off the lot!), and instead going for certified preowned cars. Certified preowned are younger cars with limited mileage and are backed with a manufacturer warranty. If you’re leery about buying used, take these suggestions from Orman to feel better about it:
-Have an independent mechanic inspect the used car (this will run about $100)
-Ask for the car’s inspection history (if they say no, this is a huge red flag)
-Run the VIN through a national database like carfax.com to get a report of the car’s history (this will run around $20)
-Read the certified preowned warranty to see what is and isn’t covered

If you absolutely want a new car, you better learn how to negotiate. “The more confused you are, the better chance the auto salesperson has at making a fat profit off of you.” Be aware of the difference between the MSRP and the invoice price (the price the dealer paid for the car), both of which are listed on the sticker in the window. The invoice price can be even lower than what is listed if the dealer got the car with manufacturer incentives. Carsdirect.com and edmunds.com provide information on dealer incentives. Do not talk financing options with the salesperson until after you agreed on a price and ask for the out the door price- the dealer will know you don’t want to be surprised with any hidden fees or costs. Compare the financing options that they offer you with what you already researched and decide how to proceed according to which one’s the better deal.

When it comes to car insurance, do not go for the cheapest policy if you’re not adequately covered. Orman offers up some ways to reduce your premium:
-The higher your credit score is, the better insurance rate you’ll have
-Check that your record with the DMV is in good shape. Look for any errors and make sure that any points that were supposed to be taken off your record were actually removed.
Opt for a high deductible. Your deductible is what you agree to pay out of pocket for any repairs that need to be made from accidents before your insurance kicks in and covers the rest. If you have a low deductible ($250 or $500), your insurer will wind up charging you more or canceling your policy if you make a lot of claims. Raise your deductible to $1,000. Use your emergency cash fund or credit card to cover the deductible if you need to make a claim and can’t pay the $1,000.
Drop your collision coverage if you have an old car. If the book value of your car (check Kelley Blue Book’s website at kbb.com) is only a few thousand dollars and you have to pay a thousand dollars before your coverage kicks in (not to mention spending hundreds of dollars a year for the coverage), it doesn’t make sense to have collision coverage.
-Get a car that isn’t popular with auto thieves. Check the Insurance Institute for Highway Safety’s website at iihs.org to see how your car or perspective car ranks.

If you’re given the choice between $3,000 cash back or 0% financing on a car loan, go for the cash back if the car costs less than $20,000. If the car is more than $20,000, go for the 0% financing.

I got my current car used from Carmax this past summer. I absolutely love my Volkswagen Golf and am so happy that I snatched it up when I did. My grandmother graciously lent me the vast majority of the money needed to pay for it since I couldn’t afford to get a car loan. I am slowly paying her back and am extremely grateful that I do not have to worry about interest rates and due dates for my car payments. I plan on looking over my insurance to see if I can save any money by raising my deductible. Jake bought his car new a little over two years ago and has been dililgently paying back his car loan ever since. His Scion better last him a good while to make up for the fact that he bought it new. I plan on asking him to go over his insurance policy to see what his current deductible is. Cars are a necessary evil for us right now. I hope, one day, we’ll be able to get by with only one vehicle or maybe none at all if we’re really lucky.

Next up for my Money Book for YF&B review is how to get the best deal when buying a house.

2 Comments so far
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I really don’t agree with the “new vs used” car arguments. I say that buying a certified used car is not a good route unless you are buying a mid to high priced car used. I helped a friend on a very tight budget look for cars. The certified used cars that were in her price range were also well outside the mileage she could get a loan for. The used cars that were in the mileage range she could get a loan for were also only a few K lower than a new car!!! Having said that, I am a fan of used cars to buy something you normally wouldn’t want to buy new. My 2000 volvo was bought in 2004 for 16K with very low mileage and in GREAT condition. At the time, I believe the same sized model was about 25K. Quite a savings. And I would do it again. I have had to only do routine maintenance on the car (new tires, oil changes, filters, windshield wiper blades, etc) and one issue with the A/C. So really do your homework to see how much you are saving by buying a used car. It could turn out to be very little.

Comment by Sara

Excellent points, Sara. Few of these personal finance things are black and white.

Comment by Sarah

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