Tips on buying a car from a dealership

Dealerships have earned a bad reputation since the beginning of time. Everyone’s uncle Ted has something bad to say about an experience they had at the “stealership” down the road…

We’re going to clear up the difference between lacking proper education and actually being taken advantage of.

When should you buy from a dealership?

Most people buy from dealerships because they believe the vehicles there have been professionally inspected, are safe to drive, and will last a long time.

While this is typically true with brand new cars (except the occasional ‘bug’ or recall), it’s not true of every car on the lot.

Let me explain: Dealerships will have ‘used’ cars for one of three reasons.

  1. Wholesale AuctionAuctions of this type include vehicles that were repossessed, impounded/confiscated (police auctions), low value trade-ins.
  2. Trade InAt brand-specific dealerships [Village Dodge, Friendly Honda], vehicle trade ins have to meet certain requirements to be put on the lot (especially as Certified Pre-owned), otherwise they’re sold wholesale to smaller non-brand specific dealers.
  3. “Demo” UnitsVehicles used at shows for marketing/product demonstration, with over 500 miles on them afterward.

Should you buy your first car from a dealership?

I wouldn’t recommend buying your first car from a dealership if you’re under the age of 25, unless of course you’re aware of the drawbacks.

The reasons I don’t recommend it is because:

  • Most new drivers are ages 16-25, which means HIGHER INSURANCE RATES and HIGHER LOAN INTEREST RATES.

    But, why is this important?

INSURANCE

If you finance a new car (or lease), your lien-holder [that’s the bank] wants to be certain you’ll continue to pay for it.

If you have low-cost car insurance, there’s a good chance it won’t cover everything in the event of an accident. Who is going to pay out of pocket to fix a car they’re already making payments on? I don’t know anybody who would.

If insurance doesn’t fix the car, and you can’t drive it, the bank knows that you’ll stop paying; and the bank really wants their money back on the investment they made with you in that loan.

Despite what some people say, the banks are not evil, and they don’t benefit from repossessing your car and auctioning it off for 45% of what you owe, then suing you in court for the remainder. Nobody benefits there.

LOAN INTEREST RATES

If you’re aged 16-25, chances are you have not established much credit. Maybe a secured credit card, or a personal loan… Am I right?

What really helps build credit is an auto loan (I know for a fact. I had 4 dealer-bought cars by the time I was 25). But, you’re going to pay a high interest rate until that credit is built.

Chances are almost guaranteed that you’ll need a co-signer if you have not established credit yet.

My first car was not purchased at a dealer, but my second was; and the interest rate was almost 11% with a co-signer with a mid-600s credit score. That’s 11% on an $18,000 loan at 72 months. That’s a lot of extra money for a 2WD pickup truck with a Borla exhaust… Don’t make my mistake.

Build up that credit first.

Buy a car from a family member who is in a better position to upgrade at a dealership. If you don’t have enough cash for that, apply for a small personal loan (up to $3,000) and set the term that makes your payments affordable (standard loans are 60 months).

The loan will build your credit, and you’ll have wheels until you grow up, and so does your credit. Plus, you can get cheap insurance as long as there is no lien-holder on the title (and there shouldn’t be if it’s a personal loan, not an auto-loan). Check your local and state law to be sure you’re compliant with loan regulations.

After age 25

Almost all of your vehicles should be purchased from a dealership, in cash if you can (or a loan if you must).

It’s just nice to get into a vehicle that is running and driving right, with no serious issues, and with an experienced operator behind the wheel.

This part is just personal opinion. Preference will vary on the individual, but the dealers are not evil, and they’re not the enemy when matched with an prepared customer.

Buy brand new, or used?

Having done both, it’s really up to you. So long as you know the pros and cons.

Brand New

There’s nothing like rolling off the lot with a 2015 Ram 1500 Crew Cab Sport with 9 miles on it. Until you make the first payment, check your loan, then check the value of the truck (now with 1,013 miles on it).

You owe $44,264, and your brand new (1 month-owned) truck… It’s worth $33,592… Yep, you’re “upside down”, and you likely will be for a few years, until the depreciation slows down, and you pay a chunk of the interest.

See, cars lose most of their value in the first 2-3 years of use, then the depreciation slows down.

So, buy new if you want uncharted territory, but be sure you’re committed to keeping that vehicle for the length of the loan (because, you can trade in before your loan is up, but if you owe more than it’s worth, the negative equity will be “rolled” into your next loan, where you’re be even more ‘upside down’).

Used

In my experience, this is the best option in most cases (not all, depending on your situation).

Buying a car that is 2-3 years old, with 24,000-36,000 miles on it is reasonable and practical.

So long as the vehicle has approximately 12,000 miles for each year of age, then it’s usually a safe move.

This is especially true if it’s “Certified Pre-Owned” because those vehicles need to meet very strict standards to be considered certified, and they usually carry the factory warranty.

Check with the finance department on warranty options. Opt for the most coverage on the “Powertrain”, because that’s where the big dollar repairs will be.

Financing

It’s the one thing that newbies overlook (or people who don’t have much experience).

Please, don’t simply stroll into a dealership empty-handed and say “I want that car”. This is how the few rotten dealerships spoil the whole bunch; by taking advantage of uneducated buyers.

Dealerships could potentially send out your credit request to 5 lenders at once (which could impact your credit score), and decide to use whichever lender they prefer, not necessarily the one that came back with the best rate.

For the love of your bank account, try to get pre-approved ahead of time.

If you don’t know what that means, then walk into your bank or financial institution and ask to be pre-approved for an auto loan. The bank loan officer will ask if you have a car in mind, to which you’ll tell them yes or no. Then they’ll ask how much you are looking to buy (you should calculate a number and divide it by 60).

Example:

$10,000 divided by 60 (months) = $166.67 per month.

This is a rough calculation, because it will vary slightly with finance charges and your interest rate, but it’s a starting point. If you can afford $200 per month, then ask the bank for a $10,000 loan.

By getting pre-approved, you gain negotiating power, because you (and the dealer) will know what you CAN afford. The dealer won’t be wasting time showing 6 cars to a person who couldn’t even get a loan on a bicycle; if you’re pre-approved, they’ll want to sell you a car to fit that number.

Warranty

This is the part in the dealership process that I burned myself on a couple of times.

If you’re buying brand new, be aware of what you’re entitled to…

Most brand new vehicles come with a factory warranty (5 year/100,000 mile). YOU DON’T NEED TO GET THE EXTENDED WARRANTY!!! Especially if you don’t drive more than 12,000 miles per year and you get it serviced at regular intervals.

If you want the warranty, then by all means, tack that onto the loan. But if you’d rather save the $3,300, let it go. The finance guy will try to explain why you simply can’t leave without it, and it’s necessary, but you can say no to it, the factory warranty is sufficient for most people.

Enjoy the process

Though it’s headache inducing, and a complete shock to the system the first few times you sign your name at the bottom of a 5 figure loan, it should be exciting.

The reason we buy new cars, or new anything is for the experience. The way we feel while driving off the lot with our new ride is… Addicting.

With that being said, don’t let it pull you into the dealer every 2 years with an “early-trade in”; it’s nothing to find yourself so far upside down on a loan that you’re getting 72 month, or even 84 month loans just to keep the payments $80/month MORE than what you can really afford.

Be smart, be educated, and remember that you can always walk out of there without buying if can’t afford it.

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