understanding gift tax

Cheapest Way to Buy a Car

So, you are in the market for a new car.

If you’ve ever bought a car before, you already understand that the experience will not be pleasant. I mean, who wants to wander around a lot all day, test drive multiple cars, and then when that fun is finally over you get to sit in a tiny office why your salesperson runs back and forth to their finance person.

In fact, car dealers are starting to realize the “joy” this experience provides, which is why a lot of dealers are removing the ability to negotiate prices. Now the sticker price listed is the final price. No more threatening to walk out and never return if they don’t meet your price and terms. It has become a take it or leave it experience, which has been better for consumers.

Before you can even arrive at that final price, you need to decide if buying the new car is the way to go. With options to buy a used car or lease a car, there may be better options for you. If you do decide on a new car, then you get to deal with the financing person which opens a lot of options to make the purchase of your car cheaper.

Should You Lease a Car

A lot of people will go back and forth on if they should lease or buy a new car. The decision to lease a car shouldn’t be that difficult and if you follow a short guideline you will be able to make the decision for yourself.

First, what does it mean to lease a car?

Leasing a car allows you to rent the car for a short period of time, usually three-years. Like renting a house, you never own the car, only paying on it for a short bit before getting rid of it and moving to something else. At the end of the lease, you turn the car back into the dealership and then you can lease a new and different car. Lease options are usually cheaper than financing a car over a longer period.

What is bad about leasing a car?

When you lease a car, you never own it. You will never have that asset under your name, all you have is a constant liability. The joy people feel when they make that last car payment is a feeling you will not feel when you lease a car.

However, not everyone holds a car throughout the life of the loan (or life of the car) so a lot of people will never experience paying a car off. It is interesting that people look down on car leases, but not on renting a home or an apartment.

There are a lot of drivers who would rather have the new-new when it comes to cars. If you are buying cars constantly and trading them back in, this can push you underwater on your car loan. For drivers who find themselves always wanting the newest and the best, you should consider getting a car lease.

The biggest caveat when leasing a car is the restriction on miles. You cannot lease a car and then make several cross-country trips. Dealerships will typically limit the miles to 10,000 – 12,000 a year. If you average more miles than that, it is a good idea to not lease. The dealership will charge per mile that you have gone over.

The best way to maximize a car purchase is to hold the car until you simply cannot drive it anymore. Leasing cars will pay off in the short run because they have cheaper monthly payments. The longer you would hold a car you bought and paid for, the better it is to buy a car.

Another benefit of leasing a car is the ability to buy the car after the lease is done. If you find a car that you absolutely love and don’t want to turn it in after the lease period is up, you may have the option to buy it. The dealership will calculate the residual value of the car and find you a loan to pay down the rest of the car.

Should You Buy a Used Car

Used cars are the next cheapest option when looking to purchase a car. It is no mystery that there is a lot of depreciation in cars. Unlike a house, cars depreciate in price the minute you drive them off a lot. When you purchase a house, you can expect the price to increase over the years.

If you’ve ever had to buy a new car and then turn around and sell the car shortly after, you will understand the hit depreciation can take. This why it is almost impossible to make money from a car purchase and sale.

When you buy a used car, you are letting someone else take that depreciation hit. The original car owner would be forced to absorb that financial loss. When purchasing a used car, there is a chance you may be able to buy and sell the car for around the same cost, even after you’ve held the car for a few years.

Off the bat, used cars are going to be cheaper. This is the original depreciation coming out of the car, making the overall purchase price a lot more affordable.

The biggest disadvantage of buying a used car is that you are buying someone else’s potential problems. You have no idea how the car was treated before you. A used car may require additional maintenance and repairs that you were not counting on.

A lot of dealerships have certified pre-owned cars that go through rigorous checks to prevent selling a car with a lot of problems, and they usually offer a shorter-term warranty to go on top. Used cars coming out of a dealership will be a bit more expensive than buying direct from a person, but it can come with some assurances on quality.

Another disadvantage to buying a used car is the lack of ability to customize the car to your liking. When you buy a new car, you can make sure you get the color, interior, and features that you want. Dealerships will locate and transport the car that you want to their dealership for you. In some cases, you can buy direct from the company, even placing your car order on a website. When you buy used, you only have available what is on the lot. You may end up having to settle for something that you didn’t exactly want. This happens even more the less time you have to shop around a buy a car. If you are in a rush, you may have to make some settlements you are not happy with. The longer time you give yourself to shop a used car, the more looking you can do.

0% Interest Loan

If you’ve ever been sitting at home and watching tv, you’ve most definitely seen a car commercial offering loans at 0% interest. A 0% interest loan is almost too good to be true. That is just free money waiting to be utilized.

There are no free lunches in this world, so where does the dealership make their money if they have 0% financing?

0% financing deals will usually show up when sales are slow, like in the summer months. This is to help stimulate car purchases and to thin out the dealership inventory before getting in next year’s models. 0% deals are not bait and switch schemes, but they do drive people into dealerships who couldn’t qualify for the offer.

To receive a favorable interest rate, you need good credit and a long credit history. Very few people will qualify for this deal, but that is the idea. You come in, fall in love with the idea of getting a new car, find that perfect car, and then after your emotions are running sky high, you find out you can’t qualify for the 0% interest rate loan.

But even if you qualify for a 0% interest rate loan, is it always the best deal? The dealership still needs to make money, even if you are one of the few that qualifies for the deal.

There are several ways a dealership can play with the numbers. First, they can adjust the interest rate that they will offer you. This is the easiest to see, a 5% interest rate doesn’t sound nearly as good as a 2.5% interest rate.

The next thing they can do is change the purchase price. The purchase price is a nice number to focus on but without considering the interest rate, this will not be the final number that you pay.

The next item that a dealership will play with is cash-back and bonus options. These bonus offers can be the key to getting yourself a good deal.

The last thing a dealership will do is change your trade-in value. If you are trading in a car to get a new car, this will give them one more lever to pull to get their price. Having a trade-in is easy to handle. You don’t have to worry about listing your car, meeting with potential buyers, and then doing the paperwork to complete the sale on your own. This does come at a cost, typically you will not receive the same amount of money when you trade into the dealership. Dealerships understand the cost of this convenience.

Picture this:

You are sitting in the tiny office of the salesperson. You have finally settled on your price, after down payment, you are going to walk out with a $30,000 car. Great! You are feeling good that your tough talk and walk out attitude finally got them to see the error of their ways and give you the price you want.

Now your salesperson is running back and forth to their finance manager trying to work on the terms of the loan.

Your salesperson returns with options.

One, you can take a 5-year loan 0% interest, or you can take a 5-year loan 5% interest but with a $5,000 cash back option.

Which one do you take?

To figure this out you need to evaluate the total cost for both loans. The first one is easy; you know the 0% interest rate is going to cost you a total of $30,000. The 5% loan will cost you a total of $28,307. You will save $1,693 for taking the 5% interest option.

In this example, if the cash back bonus is over $3,500, it makes more sense to take the higher interest loan.

What makes the higher interest loan even better is the fact that you can hold the loan for awhile and then try to refinance it for a lower interest rate.

Using an Outside Loan

So far, we’ve talked about working with the dealership directly when buying a car. However, you are not forced to use the dealership when considering your loan options. You can seek out an auto loan from a bank or credit union and bring that information to the dealership.

If you bring in your own loan, the dealership is going to lose some levers to pull. They will lose the ability to adjust the term and the interest rates. Now they are only left with trade-in value and bonuses. You better believe that these are going to be adjusted to be more favorable for the dealership when you decide not to use their lending department.

Understanding if you are working with a better deal, you must look at the total cost of your loan plus what the dealership is offering in terms of trade-in value and bonuses.

Conclusion

If you like to have a new car every few years and don’t put a lot of miles on them, it can make a lot of sense to go with a leased car. It is true that you will never own a car and will always have a liability of a monthly payment. However, that is only important if you are the type of person to hold a car for many years after paying it off. Constantly paying down a car and then trading it in for a new car is no better than just leasing the car, except it doesn’t have the mileage restriction.

Used cars come with their own set of problems but that doesn’t mean they shouldn’t be considered. Purchasing a used car out of a dealership will be more expensive but usually comes with a quality check and warranty. When buying a used car, you are probably going to have to sacrifice on some of the features or colors that you want. The more time you have to shop around, the better the chances you will walk out with something without a lot of compromises.

When you are purchasing a new car, remember that the dealership will always make their money. They can offer incentives, interest rates, and trade-in values that change the numbers enough for them to make sense. When evaluating the purchase price for new car, you need to consider the total cost for each option. This amount will truly tell you if what you think is the best deal really is. Remember, car loans don’t have to be chiseled in stone. You can work out a deal right now that might be good, but you can make it better later by refinancing it. This is probably the best way to get a cheaper car rate. Most people won’t try to refinance their car loan, just being content paying it down over time until they own it or trade it in.

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