How to Buy a Car
If you'd like to buy a car, but don't know where to begin, read this post to learn about cost estimation, researching cars, and negotiating!
People like you or I know, we have an unshakeable belief that cars are living entities. You can develop a relationship with a car.
Just wanted to start this post with a quote from the legendary Jeremy Clarkson, known for hosting Top Gear and The Grand Tour, along with James May and Richard Hammond! What he says is absolutely right: cars are personal and you will develop a relationship with yours. You may even name your car (and many people do!).
But before you get to that point, you have to buy the car and that process can be a bit overwhelming at first. While the topic of buying a car is not necessarily "software engineering, finance, or investing", as was this blog's original focus, I've gotten a lot of questions about it from my network. So I figure a post on the overall steps and what to look out for would be a great help to anyone else who is considering buying a car.
One thing I would stress though is that cars are depreciating assets. You can't "diversify your portfolio of assets" like I discussed in my stock investing post by buying a car, unless it's a classic or a super car that is increasing in value over time. So the reasons for why people buy cars, as well as their relationship to them, can vary a lot from person to person. Some people view a car as a way to get from point A to point B. Those people likely value practicality and "bang for their buck". Others have a potentially deeper relationship to their cars and I count myself among that group (can't you tell by the opening quote to this post 😁?). I value aesthetics, tech features, build quality, and how the car makes me feel when I'm driving it.
Fortunately, whatever camp you're in, you can use the same steps to buy a car!
Step 0: Do some math
Before you start researching what car you want to buy, it's a good idea to think through finances. I know, shocking right 🤣? There are a lot of costs associated with owning a car:
If you are financing (as opposed to buying with cash), how much of a down payment do you want to make and what does that translate to in monthly costs for the remainder?
How much are you expecting to pay for car insurance?
How much are you expecting to pay for gas (or electricity, if you opt for a plug-in or electric vehicle)?
Do you want tax rebates for buying green cars? Many states offer this (and Tesla popularized it a bit), but there is a phaseout based on your income level, so double check that before assuming you get a rebate.
The last three bullet points are super variable because they vary across locations. So I'm gonna tackle how to estimate car payments per month, since that's pretty specific.
Monthly Payments for Financing
If you don't buy a car outright, and you are not leasing, then you will need to finance. What that means is that a bank is loaning you money for you to buy your car. But you need to pay that money back, with interest.
I'm gonna show you a formula to use for calculating monthly payments and then I'll show you how to cheat by using Google Sheets to calculate it for you 🤣.
Joking aside, knowing how to use common financial formulas in Google Sheets is a very good skill to have (which is a subject for another post).
Alright, math formula first. When you finance, you will be paying back a constant amount per month, comprised of two parts:
A part for your principal (that goes toward paying the loan's remaining balance)
A part for interest
These two parts together make up your constant monthly payment. Let's calculate that monthly payment:
P = (P0 * r) / [1 - (1 + r)^(-n)]
P = monthly payment
P0 = initial principal
r = interest rate per year
n = number of years
Let's say we have a 5 year, $30,000 car loan at 3% interest rate per year. We can directly use the formula above, but with a small change: we need to divide r by 12 (because there are 12 months in a year) and we need to multiply n by 12 (to account for monthly periods, rather than yearly periods):
r = 0.03
P0 = 30000
n = 5
P = (30000*0.03/12) / [1 - (1 + 0.03/12)^(-5*12)]
P = $539.06
What this means is that you will pay $539.06 per month for 60 months (5 years * 12 months/year). If we were to sum up all those payments, we'd get $32,343.64. See how you actually pay more than $30,000 by the end of the 5 years? That's all due to interest 🤦♂️.
Something to note: Remember how I said that your monthly payment is comprised of a part toward your principal and another part for interest? Since the total payment you make per month is not changing, the percentage of your monthly payment that will go toward principal will increase while the amount toward interest will decrease:
How to cheat with Google Sheets
Ok, so I showed you the complicated formula above and now you're wondering, "Isn't there anything that can just calculate the monthly payment for me?" Why, yes there is! Enter Google Sheets 😁.
My Investment Analyst brother swears by Excel, but I'm a Google dude so I love Google Sheets. There's a formula called PMT() that will calculate your monthly payments for you.
Note: The PMT() formula reports numbers as costs, so there will be a negative sign. If you would prefer to have the absolute value, just multiply your PMT formula by -1 😃
The PMT formula is incredibly useful. Make sure to have this in your back pocket. I'd recommend making a "scratch spreadsheet" where you list out loan amounts on successive rows and then in another column, use PMT to calculate the monthly payment for that loan. All you have to do is prepare the first row and then use the formula fill-down to populate monthly payments in all the following rows which depend on different loan amounts.
Another reason why it's good to have a scratch spreadsheet is that when you are at a dealership and they quote you on something, you can double check it super fast (I load Google Sheets on my phone and have formula spreadsheets ready to go).
I have even made a sample car loan payments Google Sheet for you to use! Feel free to use it for your own calculations! Just tap on File > Make a copy 😃
Step 1: Do some research
Filter your choices
If you already know what car you want to get, feel free to skip this step. But I think there could still be some useful nuggets in this step that you might want to scan 😁.
For those of you who don't know which car to choose, I totally get that. There are so many makes and models that it's easy to get choice paralysis.
But, there is something that can help us: Because of Step 0, you now probably have a relative price range in mind. That relative price will allow you to target a certain type of car segment.
Within a type of car segment (city car, small family, executive), there are different levels of luxury. And by this point, you've probably filtered to around 3-5 choices for make.
As for the model, many car companies have sedans, coupes, and SUVs (some even have crossovers). Think about what use cases you have for your car and what you feel comfortable driving. If the width of a particular sedan is the same as an SUV, but you still feel like the SUV is unwieldy, then that's important to take into account.
Do some test drives
After you have filtered your choices to 3-5 makes, it's a good idea to locate some dealerships for those car companies and schedule some test drives. If you're not sure what model you want yet, that's totally fine! Car salespeople want to make a sale, so they'll be happy to show you different models and explain pros and cons. And if they do not operate like that, or are excessively pushy, find a different salesperson. Just like in all business relationships, you should feel comfortable with the representative you are working with.
While doing test drives, make sure to test out all the features of the car that are important to you. And if there's anything you don't understand, ask your dealership representative. It used to be before Covid that the representative would come with you on the test drive, but many dealerships now are allowing you to self-test drive. That is great if you already know what you're looking for and have done your research for the features you want to test, but if you're still exploring, maybe ask the representative for a brief overview before you take the car out on a test drive.
And if you find that you're not able to test all of the features, it's perfectly okay to schedule a follow up test drive. A follow up test drive does not imply that you've made an unspoken commitment to buy the car. You're just doing your research!
Story time: A car company (that shall remain unnamed) had me do 3 test drives because each time I came, certain features were not working. I ended up not going with that car company because of the unreliability of the systems that they were touting as being essential to owning the car.
Step 2: Select the car you want
After doing some test drives and researching online, it's time to come up with which car make and model you want to go with. Make sure to think about your use cases for the car (do you want to drive it in the city, or take it to Tahoe and go skiing?), what features you'd really like to have, and how much you like the car.
Also consider how you view a car. Is it just to get from point A to point B, or do you view it as something more? Just like Clarkson said, you can develop a relationship with your car.
Step 3: Buy the car
This step is the most intimidating. Most car companies do not own their own dealerships (Tesla is the exception). The dealerships are franchises and can actually set different prices for exactly the same car and features. In addition, some dealerships use a model called "no haggle pricing", which means "no negotiation". But, there are many dealerships that do use negotiation.
Buying a brand new car is a bit different from buying a used car, so I'll address both.
Buying a new car
When you buy a new car, you can either factory order it or buy something from a dealership's car lot. Unless you find something on the lot that's perfect, I am personally of the opinion that if you are buying a car brand new, you may as well do a factory order and custom configure it however you like. Some dealerships may try to pressure you to buy a car from their lot by stating that they can offer a lot of discounts. They want to close a deal fast, so that's why they use tactics like this.
However, there are abundant discounts to be found online, even for custom orders! A great source I recommend is Costco Auto. Costco Auto has pre-negotiated discounted prices for cars with certain dealerships. As you configure your car, they will show you what discounts they can apply for each feature. What this means is you can buy a brand new car, with exactly the features you want, for a cheaper price! After configuring your car, Costco will recommend some nearby dealerships that are part of the Costco Auto program. You can choose your preferred dealership (within the set of recommendations), bring your configuration, and the dealership will offer you the Costco-discounted price for the car.
In addition, many dealerships have discounts they can tack on if you ask: new college grad, loyalty (you or your family owns a car from the same manufacturer).
In fact, when I bought my car, I used Costco Auto to lower the price of my car, then tacked on a new college grad discount AND a loyalty discount. Total savings were near $7k!
Buying a used car
With a used car, you don't have to go through a custom configurator, but you can still likely negotiate and add on the discounts I mentioned above. If you would like to buy a used car, then I'd recommend seeing if your local dealership has a "Certified Pre-Owned (CPO)" program. Certified Pre-Owned cars are a bit different than just "used cars" because they get a tune up and extended warranty. So if having the latest features is not as important to you, a CPO car can be an excellent bargain because you've still got a warranty.
Step 4: Celebrate
You've got your car. Time to celebrate now! Plan a drive somewhere or go to the movies with your friends! Or, even better, do donuts in a parking lot (I'm kidding; don't do that 🤣)!
Having a car provides a great level of freedom and independence, but it also comes with some responsibility: Make sure to keep your car insurance and registration up-to-date.
Other than that, the world is your oyster!
Extra: Should you lease or buy?
Leasing can seem like an attractive option for people who would like to drive a new car every 2-3 years. Also, leasing normally has lower monthly payments than a comparable loan's monthly payments. However, there are some downsides to leasing:
You don't own the car after the end of the lease term.
Leases have mileage limits per year and if you exceed them, you pay extra PER MILE over the limit.
Excessive wear and tear can be charged to you at the end of the lease term.
You can't customize the car.
One thought experiment to try out (and then verify in Google Sheets by using Step 0 above): Two 3-year leases will end up being more expensive than one 6-year car loan. And you will continue to have even more savings in the case of car ownership beyond 6 years (because you have paid the loan entirely).