Personal Finance
First Thoughts When Looking for New Vehicle
When looking for a new vehicle there are a number of variables to consider. Walking into a dealership you can easily get distracted by the nice cars in the showroom – you know – the convertibles, SUVs and sports cars with all the features imaginable. But it’s important to stay grounded and know what is practical and what you can afford. Below is a list questions to ask yourself that will help you work through what makes the most sense for you before you make this important purchase.
Do you need a car with good gas mileage?
If gas mileage is a big concern for you it makes sense to go online and do your research! Keep in mind that not all small cars have the best gas mileage, but by searching ahead of time, you will be able to narrow your selection by finding vehicles that meet your immediate needs. Be aware that even though vehicles take E-85 (ethanol fuel) and not just gasoline, it sometimes costs more to drive to an E-85 gas station. For example, at my dealership in Michigan, surveys show that it is not cheaper to use E-85 than gasoline based on driving time to gas stations and the price difference between E-85 and gasoline.
Do you drive a lot of miles a month? A year?
If you drive over 15,000 miles a year, then leasing is not for you. If you don’t drive over 15,000 miles it might make sense to lease a vehicle rather than buy. It is important for you to know how many miles you drive when you go into the dealership because if you drive between 10,000 to 12,000 miles a year, your lease payments will be less. Make sure when the dealership is finalizing the lease paperwork you check the miles to fit your needs. By doing so, you could save yourself $20 - $30 a month for the length of your lease.
Do you want a new car every two to three years? Lease or buy?
This is the ultimate question these days. For a while it did not make sense to lease because banks were not offering leasing as an option, but leasing is coming back. I recommend leasing to many people who do not drive over 15,000 miles a year.
The way leasing works is a bank decides what the car will be worth at the end of the lease, in two to three years, and that is called a residual. A bank may decide a car will be worth 50% of its value at the end of the three-year lease so you will residualize the 50% that it is not worth. For example, if a car is $20,000 and the bank says it is worth 50% - you are financing the 50% difference, or $10,000, over a three-year lease.
At the end of the lease you have the option to buy the vehicle for the $10,000 difference or turn in the lease. Sometimes a car is worth more, sometimes less, but at the end of the lease you can find that out and decide what you’d like to do. The example I gave is rather simplistic, but residual values vary from 40% to 65% and if you are payment conscious it makes a lot of sense to look at leasing.
Do you want a monthly payment or are you paying cash for the vehicle?
When buyers come into the dealership and say, “I want a vehicle under $10,000,” I ask the salesperson if the buyer is paying cash. If you are not paying cash it really shouldn’t matter what the price of the car is if the payments work for your monthly budget. A good piece of information to keep in mind is that for every extra $1,000 down payment on the vehicle, you will reduce your monthly payment by about $10. Most people shop for a monthly payment. If that is the case, consider looking at vehicles that have rebates and specials. Each month, car manufacturers announce different rebates on different vehicles, and sometimes those rebates are $3,000 or $4,000 off the original price, which can make payments very attractive for many consumers.
Are you concerned about your car insurance?
Insurance is usually a concern for many people as it can add $100 - $200 a month to a vehicle payment. It’s important to keep in mind when looking for a new vehicle that some cars will have better insurance rates than others. Before walking into a dealership, call your insurance company so you have a basic idea about the increase of your car insurance. Many insurance companies can give rates ahead of time, which will help narrow your vehicle search. You don’t want to be set on a car, then call for insurance prices and be disappointed about your rate.
The purchase of a new vehicle is an important decision. There are a lot of things you can do ahead of time that will help you when you walk into a dealership. Hopefully, by being prepared, doing your research and answering the questions above, you will have a great car buying experience.
Have fun!
Do you need a car with good gas mileage?
If gas mileage is a big concern for you it makes sense to go online and do your research! Keep in mind that not all small cars have the best gas mileage, but by searching ahead of time, you will be able to narrow your selection by finding vehicles that meet your immediate needs. Be aware that even though vehicles take E-85 (ethanol fuel) and not just gasoline, it sometimes costs more to drive to an E-85 gas station. For example, at my dealership in Michigan, surveys show that it is not cheaper to use E-85 than gasoline based on driving time to gas stations and the price difference between E-85 and gasoline.
Do you drive a lot of miles a month? A year?
If you drive over 15,000 miles a year, then leasing is not for you. If you don’t drive over 15,000 miles it might make sense to lease a vehicle rather than buy. It is important for you to know how many miles you drive when you go into the dealership because if you drive between 10,000 to 12,000 miles a year, your lease payments will be less. Make sure when the dealership is finalizing the lease paperwork you check the miles to fit your needs. By doing so, you could save yourself $20 - $30 a month for the length of your lease.
Do you want a new car every two to three years? Lease or buy?
This is the ultimate question these days. For a while it did not make sense to lease because banks were not offering leasing as an option, but leasing is coming back. I recommend leasing to many people who do not drive over 15,000 miles a year.
The way leasing works is a bank decides what the car will be worth at the end of the lease, in two to three years, and that is called a residual. A bank may decide a car will be worth 50% of its value at the end of the three-year lease so you will residualize the 50% that it is not worth. For example, if a car is $20,000 and the bank says it is worth 50% - you are financing the 50% difference, or $10,000, over a three-year lease.
At the end of the lease you have the option to buy the vehicle for the $10,000 difference or turn in the lease. Sometimes a car is worth more, sometimes less, but at the end of the lease you can find that out and decide what you’d like to do. The example I gave is rather simplistic, but residual values vary from 40% to 65% and if you are payment conscious it makes a lot of sense to look at leasing.
Do you want a monthly payment or are you paying cash for the vehicle?
When buyers come into the dealership and say, “I want a vehicle under $10,000,” I ask the salesperson if the buyer is paying cash. If you are not paying cash it really shouldn’t matter what the price of the car is if the payments work for your monthly budget. A good piece of information to keep in mind is that for every extra $1,000 down payment on the vehicle, you will reduce your monthly payment by about $10. Most people shop for a monthly payment. If that is the case, consider looking at vehicles that have rebates and specials. Each month, car manufacturers announce different rebates on different vehicles, and sometimes those rebates are $3,000 or $4,000 off the original price, which can make payments very attractive for many consumers.
Are you concerned about your car insurance?
Insurance is usually a concern for many people as it can add $100 - $200 a month to a vehicle payment. It’s important to keep in mind when looking for a new vehicle that some cars will have better insurance rates than others. Before walking into a dealership, call your insurance company so you have a basic idea about the increase of your car insurance. Many insurance companies can give rates ahead of time, which will help narrow your vehicle search. You don’t want to be set on a car, then call for insurance prices and be disappointed about your rate.
The purchase of a new vehicle is an important decision. There are a lot of things you can do ahead of time that will help you when you walk into a dealership. Hopefully, by being prepared, doing your research and answering the questions above, you will have a great car buying experience.
Have fun!
Meet the Expert
Molly Meyer Williams
Car Dealership General ManagerRedford, Mich.
Rho Beta Chapter University of Michigan - Dearborn
Molly Meyer Williams was initiated into the Rho Beta Chapter of Phi Mu at the University of Michigan-Dearborn. Molly holds a Bachelor of Arts in Psychology and a Master of Business Administration, both from the University of Michigan-Dearborn. Molly currently is serving on Phi Mu’s National Council as Vice President Finance. Her past Phi Mu experience includes Colony Finance Coordinator, Financial Planning Group, Collegiate Finance Director, Area I Operations Director, Area I Operations/Finance Coordinator and Area I Membership Coordinator. In her everyday life Molly is the General Manager of George Matrick Chevrolet in Michigan where she resides with her husband and three children.
Other Resources
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