I Need a New Car Now What?
I know the day will come when the lease on my car will end and I’ll be the one who deals with the sales guy at the car dealer. Like any other predictable, non- recurring event if I’m prepared it’ll be easy if I don’t prepare and I allow my myself to be surprised it’ll be thermonuclear PMS. So, let’s prepare for it.
I’m blessed to know this charming older gentleman (I love his wife!) who ran a car dealership in Oklahoma. This is what he said we should know and do when buying or leasing a new car.
Women don’t need a man to go along with them, needing a man? Where are you, 1952? -please!!!
You need a plan or a strategy and to treat it like a process and stick to your plan. If you’re not following your own plan then you will be following the car salesman’s plan and that guy ain’t paying your bills.
The plan begins with research- knowledge is power! Go online and learn about the cars you’re interested in. I’m not going to recommend a specific website to use, but go to the manufacturer's website and at least two 3rd party sites to research pricing and financing. Learn to use the online payment calculators to see what the payments will be.
First Things First- How much car can I afford? (Start with the 20/4/10 rule:)
1) Make a down payment of at least 20%.
2) Finance a car for no more than 4 years.
3) Loan Payment plus Insurance should not exceed 10% of monthly gross income.
Grab your monthly spending numbers, bank statements and pay stubs. If you’ve been reading this page every week you now know that Gross Income is the amount you’re paid before tax and deductions.
Then find your most recent auto insurance bills, and figure out how much you're spending per month on premiums. Take 10% of your gross monthly income, and subtract the monthly insurance premiums. That is the monthly car payment you can afford to make.
Let's say, for example, you earn $53,000 and spend $80 a month for insurance — right around national median household income and average premium for a single car.
Gross income of $53,000 = $4,416, one-tenth of that would be $441 minus the $80 for insurance, and the monthly car payment you could afford would be $365- BOOM- You’re Taraji P. Henson again!
The major 3rd party websites have online calculators you can use to figure out monthly payments and how much you need to finance to get the payment. The amount to finance equals Selling Price + Taxes/Fees minus Down Payment. Once you know that amount multiply it by 20% or .20 and to learn the selling price you can afford.
Am I leasing or buying? The decision is yours alone to make and it must be made before you enter the dealership. Allowing the dealer to “flip” you into a lease will cost you more money than you want to spend for the next 3-4 yrs. If they do this you’re following his plan, not your plan- STICK TO YOUR PLAN.
Here’s how a lease works.
When you lease a car you the dealer isn’t selling the car to you, they are selling it to a Finance Company. You contract with the Finance Company to make the monthly lease payments. The Finance Company lets you drive the car until the contract is over. When it’s over you give them back their car and they sell the car at auction.
The dealer's plan will be to negotiate the monthly payment or the number of months instead of the sales price. When you ask what the sales price is they will answer with the monthly payment amount. Do not work the dealer's plan work your plan instead.
Know this phrase, “Cap Cost” or “Capital Cost’. The Cap Cost is the price the finance company pays for the car. The lower the Cap Cost the lower the payments. Since you’ve researched online what the selling price should be on that model insist that price be the “Cap Cost” in the lease.
The customer (that being you) is responsible for paying the taxes and fees upfront if the dealer asks for additional down payment he’ll call it a “Cap Cost Reduction”. Make him share in reducing the cap cost if you need help lowering your monthly payment. Understand that this is only to facilitate a lower payment. If you can’t live with the payment without the additional money down, you might be looking at too much car.
If you drive over 12,000 miles a year leasing probably won’t work for you. The lease payments always increase because it lowers the value of the car at the end of the contract and hurts the finance company’s ability to sell the car at auction when your contract is over. Leases are always based on mileage, know your annual mileage before you get into this conversation.
This is your bonus prize for doing your homework and reading along so far:
The Trade-In- It isn’t written in stone how much a used car is worth, they have a lot of flexibility on how much they’ll give you for your old car. Work your Plan again.
Don’t tell them you have a car to trade in, until after you have agreed on the Selling Price of the car. The trade-in value is used as part of your down payment and you have an idea of what your car is worth because of research you did. In your pre-purchase calculations for payments the approximate value of the trade as your down payment. It's not precise but it’ll be in the ballpark. Negotiate the Selling Price before you introduce the Trade-In. Make them give you more than they initially offer for your car after they have agreed to reduce the selling price more than they originally offered. You’ll save on both ends of the deal.
Finally, remember you have the ultimate power in this relationship, you can walk out anytime you want to- they know that they’re not the only car dealer in your time zone and when it’s all said and done, they want to sell you a car more than you want to buy a car!