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Buying a car

By SHARON HODGES and BARRY FRIEDMAN

© St. Petersburg Times, published October 5, 2000


Finance Chapter five

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photo
[Times art: Teresanne Cossetta]
Evan wants a car. He has been thinking about what it would be like to have a car since he was 13. Now that he has a driver's license, he can imagine what it would be like to drive to school every day, pick up his friends on Friday night, and maybe even pick up his little brother from the community center.

The only problem is that Evan doesn't have much money, and his parents aren't planning to drive a new car into the driveway and hand him the keys. Evan has to do some planning -- and fast.

For many students, a car -- new or used -- is their first major purchase. How do you match what you want with what you need? How do you know if you're getting a good deal? How do you know what you can afford? If you are shopping for a car, you have a lot to think about, including:

What kind of car meets your needs;

How to prepare yourself for the hidden costs of buying and owning a car;

How to shop for car financing;

The pros and cons of leasing a vehicle.

New or used?

Buying a car isn't just about getting transportation. It's also about money, status and safety. One of the first decisions you have to make is whether to shop for a new or used car. That decision is often based on how much a person can afford and how much he or she is willing to pay.

But the decision goes beyond money. There are several issues to consider when deciding whether to buy a new or used vehicle. For instance, think about how long you plan to own the car -- just until you go away to school, or for the next six years to get you to and from both school and work? Would you want a car to tinker with and work on, or do you need a car that requires little investment in repairs and improvements? You also want to consider what kind of driving you'll be doing -- around town or on the highway, high mileage or low mileage? And what does a car symbolize for you -- is it strictly utilitarian or is it tied to status and how you want other people to think of you?

Don't forget that safety is an important issue, too. When checking out new or used cars, be wise to safety considerations such as tires, brakes and extra safety features such as anti-lock brakes when considering what car to buy.

Another thing to keep in mind when you're thinking of buying a car: Insurance and sales tax will add to the initial cost. Don't let these expenses catch you by surprise.

New or Used chart

Things to remember

Don't make a hasty purchase. Research the make and model of car that you want before you begin shopping. Some of the Web sites to help you compare cars are www.edmunds.com, www.cars.com and www.consumerreports.com. Think of the cost of financing as part of the purchase price. Make as large a down payment as possible and finance for the shortest period of time possible to reduce the cost of the car.

Don't sign any contract or agreement that you don't understand.

Shop around before buying.

Be careful of bargains.

Don't be pressured by strong sales tactics. Know how much you can afford to spend and stick to it. Don't be talked into test-driving a car that is too expensive for you.

Special tips on buying

Want more information?

Learn more about new and used car purchases from the Federal Trade Commission. Get online and visit the FTC at www.ftc.gov. You'll find articles about car advertising, warranties, service contracts, buying new and used cars, car leasing, and much more.

If you're buying used

Where to buy? You can buy a used car from a dealer, but you can also buy a used car from a private person. Dealers can include franchise car companies that represent a particular brand of car or they can be independent companies that sell a variety of cars. Dealers can also include rental car companies, car leasing companies and used car superstores. One of the advantages of buying through a dealer is that they may offer a better warranty than an individual seller. However, you may not be able to take a car off the dealer's lot to have a mechanical inspection done because of insurance restrictions.

You can find out about cars that are being sold by individuals from friends and neighbors, newspaper classified advertisements, bulletin boards, or a sign on the car itself. Some of the advantages of buying from an individual are that you may find a better price through a private owner than you would through a dealer and you can usually arrange to have the car inspected for mechanical problems before you commit to the purchase. But you should keep in mind that there will not be a warranty on the car unless it is covered by the original manufacturer's warranty and sometimes manufacturer warranties are not transferable to second owners.

If you're buying new

If you're planning to buy a new car, there are several things you should do before you visit the dealership. Start by thinking about what kind of car you would like. Talk to people about their cars, what they like about them, how much they cost, and what kinds of service and repairs they have required. Compare information about car features, cost and reliability to narrow the field to one or two models in your price range that you are interested in.

Once you have decided on a couple of models that interest you, you can read about the models that interest you in more detail by looking at Consumer Reports at the public library or looking on the Internet for information about comparative car values. It can also be helpful to ask friends and family for recommendations on a car salesman to use.

Financing a new or used car

Car loans are available from a number of sources: banks, credit unions and auto dealers. Shop around and see where you get the best terms. Don't forget the possibility of financing a car with a loan from a relative. Remember that the amount of the down payment, the interest rate (APR), and the term (length of time) of the loan will change the actual cost of the car.

Interest rates are different for new and used cars. Usually, the interest rate is slightly higher for a used car than for a new one. Sometimes the interest rate is slightly lower if you borrow money for less time.

Car leasing

Leasing a car is a lot like renting an apartment: you pay a lease expense every month but you do not gain ownership. At the end of the lease, you give the car back.

Many new cars are promoted by advertising the amount of their monthly lease payment instead of a sticker price. One reason car dealers do this is to focus the customer's attention on an affordable monthly price instead of on the total purchase price of the car. Car leasing has made more expensive cars affordable -- if the only thing you consider is the monthly lease expense. But, actually, there's a lot more than the cost of the monthly lease payment to think about.

Among the advantages of leasing a car are lower monthly payments, not worrying about the depreciation or value lost on the car during the time you lease it, and the fact that leasing cars makes it easier to drive a new car at the end of each two- or three-year lease.

The disadvantages of leasing are worth considering, too. One of the chief disadvantages is that you won't own the car at the end of the lease unless you make arrangements for a purchase option. This can be complicated because the purchase amount may be more than the value of the car at the end of the lease.

In addition, there are extra costs for exceeding the maximum amount of mileage allowed in the lease contract and for extra wear and tear on the car and penalties for canceling a lease before the end of the lease term. It is also important to ask your insurance agent about whether it is more expensive to insure a leased vehicle than one you are buying.

What it costs to own a car

How do you know how much it will really cost you to own a car? Some car expenses are fixed, meaning they will cost you the same amount each month or year. These fixed expenses include a loan or lease payment and the cost of insurance. Other car expenses are variable, meaning they will change from month to month or year to year, depending on circumstances. These variable expenses include repairs and replacing tires and servicing the brakes of your car. You can estimate some of the variable expenses of owning a car by reading about the car you are interested in purchasing and talking to a mechanic who would service your car.

Evan did research on his anticipated car purchase and decided he couldn't afford to buy a car right now. Sure, he could find a car within the limits of his bank account. But if he was completely honest with himself, he had to admit that a car within his price range would probably come in need of costly repairs. He thought about asking his parents to help him get a car loan, so he could buy a newer car, but his budget calculations made it clear he would have to have a pretty good job to keep up with the car payments. Finally, he cut a deal with his parents. They agreed to let him have use of one of the family cars if he paid for his own gasoline and took responsibility for keeping both family cars clean. They would even pay the monthly insurance expense. Since his parents need the cars to get to work every day, he couldn't drive to school, but at least he could get around on evenings and weekends. It wasn't perfect, but it would do for now.

Sharon Hodges and Barry Friedman are authors of Financial Freedom, a booklet on personal finance available free through the Florida Council on Economic Education.

About the Florida Council on Economic Education

Money Stuff was developed by the Florida Council on Economic Education and project director Fonda Anderson. The council is a statewide non-profit organization founded in 1975 to educate K-12 teachers and students about the free enterprise system and to instill in them an appreciation for a market economy. For more information on the council's programs for teachers and students, please call (813) 289-8489.

About Newspaper in Education

The St. Petersburg Times devotes news space to NIE features throughout the year, including this classroom series. The Times' NIE department works with local businesses and individuals to enrich the classroom experience by providing newspapers, supplemental guides and educational services to schools in the Tampa Bay area. To find out how you can become involved in NIE, please call (727) 893-8969 or (800) 333-7505, ext. 8969.

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