The First Step Is The Hardest
Every day, thousands of people hit car lots with hopes of taking home their next vehicle. Whether it's a dream car, a family car or a commuter car, the fact remains that a vehicle is one of the largest purchases in a person's life. Nonetheless, after years of working in the industry, I became aware that both beginners and experienced car buyers approached their purchases without some very basic information and, usually, with a very negative outlook toward the salesperson, the dealership and the car buying process. Still, they all don their game faces and stroll to the lot ready for battle.
As mentioned in "An Insiders Guide to The Parts of a Car Deal," I am a firm believer that knowledge is power. In a car deal, the first step toward knowledge is research and, like many first steps, it is the hardest. Research itself is not hard, but dedicating oneself to do it and knowing what to research present obstacles that many buyers avoid. Hopefully, this article will help buyers to take this important step.
Serious car buyers often hear that they need to do some research before they buy a car, so they buy books, read magazines, talk to friends and go online in search of information. Unfortunately, they end up spinning their wheels because they don't know what to research. Sure, they have reams of printouts and clippings, and they may even have a strategy memorized, but they still go to the dealership without useful information.
A good, experienced car salesperson starts his "Road to the Sale" with questions about the buyer. Typically, the questions revolve around the acronym "FORMA" (family, occupation, recreation, motivation and area of activity). The salesperson will use the acronym "CAUSED" (cost, appearance/performance, utility, safety, economy and dependability) to ferret out the buyer's hot buttons. Car buyers need to ask themselves the same type of questions. The "FORMA" answers show the types of cars that will meet the buyer's needs and will fit into the buyer's lifestyle. The "CAUSED" answers show the types of features that appeal to the buyer. Socrates once said, "The unexamined life is not worth living." Buyers need to look at their own lives and preferences before they pick a car to buy. Far too often, young parents with a kid in a car seat and another on the way focus their search on two-door sports cars with small trunks. So, the first thing to research is oneself.
Research The Cars
After figuring out the types of cars that work, buyers need to research those vehicles. Even if a sports car would work, the buyer should ignore sports cars if her lifestyle calls for an economical, four-door sedan. Similarly, the construction foreman who needs a truck should ignore cars, SUVs and vans that won't work for him. Researching cars is easier today than ever. Information on pricing, features, options, performance, safety and cost of ownership is readily available online, in magazines and car buying guides. Research similar cars from different manufacturers. Many buyers hesitate to research some cars for dubious reasons. When the government bailed out GM and Chrysler/Dodge/Jeep, car buyers who wanted to "buy American" and protest the bailout turned to Ford. Consumers made Ford F-series trucks the best-selling vehicle despite the facts that many Ford trucks come from Mexico and all Toyota Tundras originate in Texas. When researching price, a buyer should look at the Manufacturer's Suggested Retail Price (MSRP), or sticker price, and the invoice price. The MSRP for a specific car is constant, but invoice prices vary. Unlike the MSRP, invoice prices are closely guarded, so price guides estimate the invoice price. Additionally, the buyer needs to research the discounts and rebates available for specific cars. Discounts come from the dealer, but rebates are from the manufacturer. Knowing the difference between a discount and a rebate enables the buyer to recognize exactly how a dealership got to its price. Cost of ownership is another important number and it is very different from the price. Cost of ownership is typically figured over a five-year period and factors in the cost of insurance, gas, maintenance and repairs. A car with a lower price can cost more over time than a higher priced car that is more reliable or more fuel-efficient. A buyer's research is more effective when the buyer understands what the research means.
Research Financing Options
After researching the vehicle, a buyer needs to look at the finance options. Many buyers equate finance options with interest rates or lenders, but finance options involve much more. There are five basic ways to buy or finance a car: pay cash, finance through a personal bank, finance through a dealership's lenders, finance through the dealership itself, and lease. Most people finance through the dealership's lenders. This option represents the path of least resistance, but it is not necessarily the best option. Since there is no way of knowing what the dealership will offer, a savvy buyer will talk to at least one bank before going to the dealership. A bank can give a loan approval that shows its interest rate, term and amount financed. Of course, some buyers are unable to secure bank financing. These buyers are at a disadvantage, but they might be able to get financing through the dealership or its lenders.
The interest rate on a car loan is the price over some time period that a bank charges for lending money; the finance charge on a car loan is the dollar amount that a buyer will pay in interest over the life of the loan. Loan contracts show the interest rate and the finance charge for the life of the loan. States vary in their treatment of finance charges and interest rates, so buyers should research the policy in their respective states. In Texas, all car loans are simple, fixed-interest loans with no penalty for pre-payment, so there is an incentive to pay the car loan early. Some states lack this benefit. Interest rates are largely, but not entirely, dependent upon a buyer's credit score. There are three credit rating bureaus, Equifax, Experian and Transunion. A buyer can obtain a copy of her credit report from each bureau by mail or online. The credit score from the credit bureau is a general credit score. However, dealerships use an Auto Industry Enhanced credit score that gives more weight to a person's car buying history. More often than not, the general credit score and enhanced credit score have negligible differences. The largest differences occur when a buyer has decent credit but pays poorly on car loans (a potentially negative difference) or when a buyer has damaged credit but meticulously pays his car loans (a potentially positive difference). A buyer needs to know her relative credit worthiness.
Buyers with average credit or better generally finance a car through their own bank or through the dealership's lenders. Buyers who don't qualify for conventional financing have only two options available; they can pay cash for a car or they can finance with the dealership itself. In the second case, the dealership acts like the bank but charges higher interest rates. Dealerships that finance cars in this way are "note lots," "tote the note lots," or "buy here, pay here lots." Buyers with above average credit have a lease option available on most cars and should research leasing before going to the dealership. The knee-jerk reaction of most buyers is to ignore leasing, but that reaction costs some buyers a lot of money. Similarly, buyers who pay cash when 0% interest is available are missing out on earned interest from their own bank or investments. For the record, a 0% interest rate means that there is no finance charge on the contract; there is no underlying trick behind the rate. Since interest equates to money, the type of financing affects the monthly car payment. There are several online loan calculators that give buyers an estimated monthly payment based upon the price of a car, the down payment, the trade-in value, the interest rate and the term of the loan. There are also calculators for lease payments.
Know Who You Are Dealing With
After examining himself, researching cars and learning about finance options, a buyer prepares himself to visit a specific dealership. Not all dealerships are the same, so the buyer needs to spend some time researching dealerships and salespeople. Friends and family can tell a buyer about their experiences with different dealerships. There are also websites that invite buyers to rate dealerships and salespeople. A buyer can visit those websites and read the reviews to find a suitable dealership. Buyers can also research the Better Business Bureau and local Chambers of Commerce to round out their picture of different dealerships. Finally, newspaper ads and dealership websites provide information about current sales, discounts, and rebates.
Research is the tool that provides the foundation for a well-informed visit to a dealership. Since research saves money, buyers who avoid doing any meaningful research are setting themselves up for a long, costly day at the dealership. Hopefully, this article helps prospective buyers with their research, saving them time and money. Articles about other car buying steps are coming soon. In the meantime, Happy Motoring!