In the market for a new car or truck? Perhaps you’re in the market for a used one? Over the past several months, a number of our clients have reached out for guidance on acquiring another vehicle for themselves or a family member. Often, questions surround this transaction as cash flow and other financial priorities are impacted. Should they pay cash from their reserve account? Should they purchase or lease? New versus used? Dealer financing or private financing? How long should finance terms stretch? What’s the best way to navigate the sales process given current health concerns?
Last week the Wall Street Journal published an article on increased demand for used car sales despite the pandemic. The article highlighted there is less new car inventory on dealer lots given reduced production. Those who purchased in March and April when no one else did had a lot of choices and likely did well on their purchase. Many shoppers who are in the market now may have a better chance of finding a used vehicle as new inventory is currently low, but slowly increasing.
This had me thinking about my bike rides on the W&OD trail the past several months. This trail crosses a bridge over Route 28 in Ashburn which provides an elevated view of the Dulles CarMax lot. I recall that, while riding back in April, I had never seen so many cars in one lot before. Cars and trucks were triple parked on top of each other with very little room. Fast forward to a week ago and the lot is significantly less full, more empty spots.
The following offers some points of consideration and guidance when preparing for your next auto purchase:
- Do your homework first. There are a ton of resources online including Edmunds.com, NADA.com and Kelley Blue Book (kbb.com) which provide information on both new and used cars and trucks, including reviews and best pricing. When you go to locate vehicles to look at, you can turn to Cars.com and AutoTrader.com (both have app versions as well) where they will allow you to filter and sort all kinds of criteria such as distance to seller, vehicle features, mileage, age and more.
- Consider how much you want to spend each month should you choose to finance or lease. Interest rates on loans are currently quite low. New car loans are around 3 percent +/- based on various loan periods with used car loans around 4 percent. If you decide to purchase new, some manufacturers are offering 0 percent interest for terms up to 84 months. That’s a long time to pay for a vehicle that often declines in value.
- Speaking of financing, it’s important to know how long you want to pay on your car loan. Credit unions, banks, and online lenders can quickly provide you a loan in advance of the purchase. Often these rates may be more competitive then what the dealer may offer. Having your financing in place before you finalize your purchase may help you avoid overspending. Want to pay cash, that works too. It’s important you leave yourself with enough cash reserves to cover other short-term needs, emergency funds, and big-ticket expenses in the near term. In some cases, dealerships may provide you with a better sale price if you elect their financing choices on a new vehicle so they may collect the nominal interest charges overtime. Prepayment penalties may be avoided by financing the purchase initially and then paying off the loan in the following months.
- Make sure to factor in the various misc. costs that arrive with the purchase. This may include increased insurance premiums, increased fuel costs as engines are more efficient today but some require premium fuel, routine maintenance, and a charging station in your garage (if choose an electric car). Fairfax County residents need to anticipate a car tax bill each October based on the value of the vehicle.
- Lease or purchase?
- A lease allows you to “rent” a car for a certain timeframe with an annual mileage allowance each year. Terms tend to last 36 or 39 months before you turn it back in. Leases can be tricky to calculate as there are several moving parts to the transaction. The upside is there are plenty of online resources available to assist you with the math and you get to drive a new car. With most of us working and living from home without a commute, leases may be more attractive now, though you will always have a car payment with leasing.
- Purchasing a car, you’ll own it outright when the loan is paid off. At some point no car payment will be necessary and you may direct these dollars to another purpose in your cashflow system. Purchasing works well for families who may have other young drivers preparing to take the road soon. Having another driver in the family may ease the hustle of running around to different activities when life gets back to normal. Of course, maintenance costs and insurance will continue, servicing an older vehicle may be expensive depending on the model so having cash set aside to cover these costs is a good thing. Purchasing tends to be the best long-term approach from a cost and user perspective as the “new car smell” wears off overtime.
- Buy online or from a traditional dealer? Both approaches have their pros and cons. Buying online may make for a smoother sales process but sometimes it’s best to see what you are buying before the car arrives at your home. Should you decide to purchase online, and the vehicle is arriving from another state, make sure the dealer will do the required registration paperwork for you. Attempting to complete this yourself at the DMV which now requires appointments is a hassle and may not happen as quickly as you like.
So, you’ve done your homework, know what you want, determined how you’ll pay for it, and are ready to proceed. The following steps may make the process easier from a sales perspective.
- Contact the dealership, speak to a manager, provide them with the VIN number of the car you are interested in and arrange a test drive in advance. Arrive at the dealership for the test drive or ask them to bring the car to your home. Given the times we live in this works as dealers are accommodating.
- Test drive the car to ensure it meets your needs and your happy with it.
- Leave the dealership or turn over the keys and complete the transaction with the manager via email or phone. Schedule an appointment during the week when it’s less busy to return and sign the required documents. It’s just not necessary today to burn hours at a dealership, your time is more valuable than that and there are safety concerns to consider. Most transaction paperwork may be readied in advance with you providing some basic information. Review the bill of sale which will identify all the charges, fees, and taxes as part of the transaction. The goal is to make the paper process as smooth and efficient for everyone so you may be on your way.
- Go enjoy your new ride!