SPENDING MONEY – BUYING A CAR

Unit Overview Do you own a vehicle (car, truck, SUV, etc.)? Do you plan on buying one in the future? If you answered yes to these questions you are like many Americans who are both dependent on and fascinated with the automobile. It is likely that one of your first major purchases will be a vehicle According to the U.S. Department of Transportation, about 7 to 8 million new cars are sold every year. This unit presents the advantages and disadvantages of new as well as used cars along with the pros and cons of leasing. Types of dealerships, warranties and additional expenses involved in automobile ownership are also discussed.

Buying an Automobile

New or Used?

If you are planning to buy a car, one of the first decisions you must make is whether to purchase a new vehicle or a used one. Each option has advantages and disadvantages. A new car is expensive, and it depreciates (decreases in value) the moment it is driven off the dealer’s lot. On the other hand, it is less likely to need costly repairs. A used car may be more affordable but may require more repairs.

  Car Shopping

Before you shop for an automobile, consider the following:

Where to Shop for a Vehicle

New car dealerships sell both new and used cars. They are usually staffed with knowledgeable people and have a service department. Cars are generally in good condition, and many offer warranties. Prices are often higher than other sources.

Used-car dealerships specialize in previously owned vehicles. Warranties are limited, if available at all. Vehicles range in condition from poor to good.

Private individuals place ads in newspapers and on web sites to sell their own automobiles. These vehicles can be good deals, but buyers need to be cautious. Private sales provide little in terms of consumer protection or warranties.  

Other sources include sales by auction houses, government agencies or auto rental companies. These cars usually have a lot of mileage.

Ask about Warranties

A warranty is a guarantee or assurance that your call will work at least through a stated period of time. If this is not the case, it is replaced or repaired according to the agreement. Warranties do not cover everything. Parts that are consumable or designed to wear, such as wiper blades or brake pads, are usually not covered. Some manufacturers offer services beyond the basic warranty such as scheduled service and even roadside assistance. These are often called extended warranties. Read over the warranty before you buy so you know what is and is not covered.

Read the Federal Trade Commission’s PDF document Buying a Used Car or visit http://www.ftc.gov/bcp/menus/consumer/autos/buy.shtm and open the document online.

Answer Assessment questions 1-14

Shop Around for the Best Financing
The absolute best way to save money is pay for the entire purchase without borrowing any money. Unfortunately, not everyone is in that position, especially when buying a car.

Most buyers pay a portion of the price or a down payment and take out a loan for the remainder. The amount that you borrow is known as the principal. It is also the amount on which you pay interest.

For example, if Sam is buying a used car that is priced at $5,000 and he puts $1,000 down (down payment), he will need to borrow $4,000. Of course, he will have to pay interest on that $4,000.

Study the chart below to see how much it will cost Sam to borrow $4,000 at different interest rates and for different lengths of time.

Calculated using Bankrate.com loan calculator.

What if Sam borrowed $5,000 instead of $4,000? Study the table below.

Answer Assessment questions 15-18.

 
Car Financing Tips

• Make as big a down payment as you possibly can.
• Shop for the lowest interest rate.
• Take the loan out for the shortest time period you can afford.
• Get a loan from a bank or credit union instead of from a car dealership. Dealership financing is usually more expensive.
• Don’t take a loan out for more than you can comfortably pay back.
• Whenever possible, pay extra on the principal so you can get the loan paid off quickly.
• Be sure you understand the terms of the loan before you sign anything.

Advantages Many lease agreements require only a small or no down payment. Monthly payments are usually less than if you were financing. Often maintenance costs are included in the lease. Don’t have to worry about selling your car when the lease ends. You may be able to lease a more expensive car than you are able to buy.

Cars are expensive so think carefully about whether a new or used one makes more sense for you. If you can’t pay for a car with cash, look for the best financing deal. Leasing a car is also an option. The cost of car ownership doesn’t stop when you have the title in your hand; there are many continuing costs.

The Big Decision

Answer Assessment questions 19-27.