financial literacy for young women So you want to buy a car...

Transcription

1 financial literacy for young women So you want to buy a car...

2 You re on the ROAD to enhance your economic literacy and secure your financial future! I m a couple years out of college now and can proudly say I ve accomplished a lot. I recently got a new job, I moved into an apartment in the city, and am financially independent. With my new job and a higher salary, it didn t take me long to decide where to spend the money. I decided to buy a car of my own. Purchasing a car is like going to the grocery store to buy food for a meal. You write a list in advance and figure out how much of each ingredient you will need. You might even print out coupons to save some extra money. Preparation ahead of time can help you to avoid spending more money than necessary or coming home with the wrong items. In a similar way, doing your research before buying a car is extremely important; you don t want to simply walk into the dealership without knowledge of what you want, what you need, and most importantly, what you can afford! There are several factors to be aware of when purchasing a vehicle, and I was unaware of many of them before I started the car-buying process. With so many factors to consider from cost, safety features, and reliability to gas mileage and insurance options finding the right match can feel overwhelming. If you re thinking about buying a car now or plan to when you can afford it, here are some helpful tips and things you must know.

3 Where to Start: Buying my own car was, without a doubt, the biggest purchase I have made in my life so far. Before I bought my car I knew nearly nothing about what to look for. My parents suggested that I start by flipping through the car section in the local newspaper, just to get an idea of the price range of different models, including the cost of monthly payments. The more I looked, the more I realized how many options there are four doors, two doors, and four-wheel drive, hard roof, sunroof, convertible! I spent numerous Sunday mornings sitting at my kitchen table in pajamas collecting car ads from newspapers I wanted to know about all the prices and deals out there! My parents stressed that one of the most important factors in buying a car is my credit score. They told me that lenders will look at my score to see how reliable I am as a borrower and will determine how much to give me and at what interest rate. Luckily, I do have a credit history, which makes this whole process way less stressful. My parents also explained to me that buying a car means more than just the cost of the car itself. As a car owner, I am responsible for auto insurance, gas, parking, and maintenance expenses. While the price of a car may be negotiable, auto insurance is not. I need to calculate not only the cost of the car into my budget, but all relevant factors. I m not required to pay for the car in full the day I buy it (Phew, because I do not have thousands of dollars lying around to purchase a car all at once). I can make a down payment instead, and pay off the price of the car over a set period of time. New, Used and Leased: When I decided I was ready to purchase my own car, I assumed that I would buy a used car, putting down no more than $5000 initially on an old model and buying a new car when I could afford it. I figured that as a young professional in a city, a brand new car was totally out of my price range and unnecessary, considering I often use public transportation. But as I began my research, I discovered that buying a new car or a newer used car (meaning, a used car that is only a couple of years old), though more expensive upfront, will cost me less over time. The case for buying new: My sister Ivy, who actually bought a car of her own last year, decided to go totally new. Being financially able to afford a new car, she felt that it was the best choice for her. Why? New cars require less maintenance: Ivy wanted a reliable car that wouldn t require tune ups and repairs right away and wouldn t break down soon after she bought it. New vehicles usually don t require much maintenance for the first several thousand miles; usually, only routine oil changes and tune ups are necessary. For the first few years of ownership, a new vehicle likely won t need new tires, a battery, exhaust system, or brakes. New vehicles are covered under warranty: My sister felt safer knowing that new cars have warranty coverage provided by the manufacturer for at least three years, or sometimes, even longer. Under a manufacturer s warranty, if something goes wrong with the car, it s the responsibility of the dealer and manufacturer to fix it.

4 The most common warranty coverage is called bumper-to-bumper, which typically covers almost every part of the vehicle. There are some bumper warranty offer before Always review the bumper-to- exclusions, including regular wear and tear, purchasing any vehicle. Once the and the manufacturer usually requires the owner to have routine scheduled maintenance in responsible for the cost of all warranty expires, you become order to continue receiving coverage. Bumperto-bumper warranties usually last about up to repairs and replacement parts your vehicle may need. three years or 36,000 miles--whichever comes first. Some warranties last up to 10 years or 100,000 miles, while others only last up to three months or 3,600 miles. Vehicles are protected under State laws: Consumer protection laws or Lemon Laws protect car buyers by requiring a seller or manufacturer of faulty motor vehicles to either replace or repair the car, or to refund the buyer s money. Ivy was willing to spend more on a new car to be protected under Lemon Laws. If my sister encounters problems with her new car and can prove it is defective, she could receive a replacement vehicle or get her money back. Consumer laws vary from state to state, so make sure you know what your state s regulations for a defective car. The case for buying a used car: If you re on a tight budget (like me!), it might make more sense to buy a used car. For example, buying a 3-year-old model instead of a brand new car could save you as much as 30% to 40%. The good news is that buying used doesn t mean you ll be driving around in a 1967 Sedan without air conditioning or a radio. If you know what you re looking for, used cars can be a great option. You can still get a warranty on your car, even if it s used: In the last couple of years, car dealers have introduced certified pre-owned programs for newer used cars, which provide warranties that extend beyond the initial coverage that comes with a new car. The used car must pass a series of inspections before it can become certified. Once a car passes the inspection, the manufacturer adds a new warranty that can last up to 12 months or more. For me, buying a certified pre-owned car made the most sense because I was able to save money and be covered under a warranty. Buying used doesn t mean buying a piece of junk: Even a used car can be a quality purchase. Since each brand of car is different, use the Kelley Blue Book online tool to check the value of various used cars, including number of miles, condition of the interior, cost of repairs, and accident history. What could have happened if I had bought my neighbor s car: At first, I thought it was a great idea to purchase my neighbor s used car after she offered it to me at a lower price than what I had seen in ads. After learning that the car was not certified pre-owned and was no longer covered under its initial warranty, I felt unsure about purchasing a used car without coverage. I was also worried about the danger that the car might be a lemon, which could leave me with a defective car I didn t want and a neighbor I didn t want to talk to, either.

5 Other helpful tips for buying a used car: Make sure to check if the used car has been in an accident. A car that has been in accident may have hidden damages that can make it unsafe to drive. Check for rust. While rust on a car may seem like a cosmetic issue, rust can actually eat away at the components of car, jeopardizing the structure and safety. Because sellers can cover up the rust with paint, it can be difficult to tell what condition the car is in just by looking at it. To avoid buying a used car (from a dealer or a private seller) that is rustier than it appears, run a maintenance check through a local mechanic. Avoid facing odometer fraud. This occurs when someone rolls back an odometer so that the vehicle appears to have lower mileage than it actually does. Spend a little extra money to run a history report and get the car fully checked out by your local mechanic to avoid purchasing a car with more miles on it than you re told. If you re buying a used car, make sure you buy it from a car dealer. This way, you ll avoid buying a car as is from a friend or private seller that you can t return after you buy. The case for leasing a car: While buying a used car made the most sense for me, my friend Ben decided to lease a car, which is a way to borrow a car from a dealership for a set period of time. Here are some of the benefits of leasing: More affordable monthly payments: Ben wanted a car of his own, but couldn t afford buying new or certified pre-owned, and didn t feel safe purchasing a cheap, old car. When you lease a car, you make monthly payments for a certain amount of time, for as little as a couple of months to as long as a couple of years. You re not committed to keeping the car forever: When your leasing agreement is up, you can renew the lease or return the car to the dealer. Ben wasn t ready to commit to buying a vehicle; leasing allowed him to have a car without the pressure of making a huge commitment. Something to consider when deciding between buying new, used or leasing is the overall, long term costs. While a used car might be cheaper now, will repairs and maintenance make it more expensive over time? True Cost to Own is an online tool that will calculate the cost of a car over a period of five years, taking into account taxes, fees, financing, fuel, insurance, maintenance, and repairs. Finding the Right Car: After deciding that buying a certified used car was the best option for me, I began my search for which car I would buy. The very first step is figuring out approximately how much I was able to spend.

6 Figuring out how much to spend on my car: Over the past couple of years, I had been saving money to buy a car. And boy, am I glad I saved I had saved $4,000 that I could use for a down payment! Next, I had to budget for monthly payments, auto insurance, and gas costs. With my new job paying me $5,000 more a year than my previous income, I suddenly had an extra $400 left in my monthly budget. By researching online, I found out that as a single, 27 year old woman with a clean driving record, my insurance would cost me about $1,000 a year. This allowed me to set aside about $300 for monthly payments and about $100 monthly for insurance and gas. Luckily, my building and work offered free parking so I could factor those costs out of my already tight budget. When figuring out how much you can spend, don t forget to factor in the cost of monthly payments, car insurance, gas and parking as well. The next step is to figure out what kind of car you want and which model is the safest and most reliable. While you might want a flashy colored car or a well-known brand (I know I did!), here s a checklist of essential, non-cosmetic factors to consider that will help focus your search. Have you thought about safety? If you re buying a car, safety should be the number one priority. I used Safecar, a site that rates cars on crashworthiness and rollover safety. What about a car s reliability? Buying a car that won t let you down is extremely important. Plus, if you buy used you may not have a warranty, so a reliable model is safer and will potentially save you money on future repairs. ReliabilityIndex gives you a review of the reliability of different makes and models. What about fuel efficiency? A vehicle with good fuel efficiency was especially important to me because I didn t want a car that would leave a huge carbon footprint and guzzle gas, costing me big bucks at the pump. To learn about fuel economy rating and miles per gallon for specific cars, visit Fuel Economy.gov. How much space you need? Do you want something compact and small or do you need space to carpool or transport large things? When searching for models, buy a car that has enough space to satisfy your needs. When I imagined driving in my future car, I saw myself with a sunroof, heated seats for the winter, a GPS, and even maybe bluetooth. But very quickly I learned that not all cars come with the same amenities, or even the most basic features like a radio. Each feature increases the price of the vehicle, too. My dreams of driving down the highway with a sunroof open and my hair flowing have been put on hold until I can afford a nicer car.

7 How much should the car cost? I looked online to compare the prices of different car models. Among the best websites I found are Kelley Blue Book s and Edmunds. Both are free and will let you check the going prices for almost every make, model and year you could want. Both sites list new and used car prices, as well. Sites like Autotrader.com and Cars.com list classified ads for used cars, mostly from dealers. Enter your zip code and you ll get a selection of cars within 100 miles or so of your home. Holiday seasons and other times to snag a great deal: When I started thinking about buying a car, my mind drifted back to the hundreds of commercials I had watched about car deals during holiday seasons, such as Labor Day, the Fourth of July, Christmas and New Year s. I was curious if any of these deals would really make a difference in the amount I would pay. My parents explained that holidays are a good time to buy cars because dealerships make offers that save you money. Specifically, at the end of a year, a dealership may still have leftovers from the previous model year available that they are trying to sell before the New Year begins. Because the winter months are typically a dealership s slowest season, you may find better deals during that time. I also learned that another great time to buy a car is at the end of the month. Why? Many dealerships establish monthly sales quotas that encourage each salesperson to make a certain number of deals. The last week of the month, especially the last weekend, sales people are working to reach their quota and this could work in your favor. Visiting the Car Dealership: After getting an idea of a few different models that fit my requirements, I headed straight to my local dealership for the winter holiday sale to see what they had on site and to test drive some cars. Only go to the dealership once you have an idea of what you re willing to spend and what you re looking for in a car. (It s not like you re walking around a store to find a pair of shoes or a dress for a party. This is a car we re talking about.) Having an idea of what you want will save you and the dealership time from roaming filled lots without a clue of what you want to go home with. I told the salesperson how much I could spend and that I was looking for a certified used car with good safety ratings, high fuel efficiency, and four doors. After showing me different models, I test drove the cars. As I drove around, I paid attention to the acceleration, the breaks, the dashboard, going in reverse, and even putting the windows up and down a couple of times. The test drive is your time to test all the different parts of the car and you want to get the best idea of what feels right for you. It might feel uncomfortable to have the salesperson with you in the car during the test drive, but I just used it as an opportunity to ask questions about different options for warranties and how much it would cost to add other features. Plus, it felt awesome to be driving around a car that might become my own! Don t be afraid to test drive different cars if you re unhappy with the models that the salesperson shows you. Buying a car is a major purchase and you should want to go home with a car you love, not a car the salesperson loves.

8 Getting the Best Deal Negotiating the cost of your car: After a round of exhilarating test driving (just kidding, we took a couple laps around the block), I found a car that satisfied all my requirements, felt great to drive, and fit into my budget. Next step: negotiating the price. The price of many cars, even certified used cars, can be negotiated. My uncle, who buys a car about every four years, gave me some of his best negotiating tips. 1. Research the True Market Value (TMV), the price at which the dealer will likely sell you the car. By knowing the estimated price and all related costs, you can prepare for your negotiation before you reach the dealership. If you plan on buying a certified used car, here are some extra tips: Using Kelley Blue Book, find the Suggested Retail Value of a car, which lists how much a used car would cost with a warranty. Next, choose Trade in Value from the menu bar to determine how much the dealership probably owns the car for. By comparing the prices, you can be ready to make an offer. It is fair to offer $1,000 over the trade-in value and $1,500 for the warranty because the dealership probably paid more than $1,000 to have the car certified. Print out all of the values from the Kelley Blue Book website for negotiations and bring them to the dealership with you so that you are ready to negotiate and buy if your price is met. 2. Start negotiations by informing your car salesperson that you re ready and willing to purchase the vehicle, but only if an agreement on the proper price can be made. 3. Make an offer that is slightly less than the TMV, but be realistic about your negotiation. For example, do not offer $12,000 for a $25,000 car. By making a realistic offer, you are showing the dealer that you are serious about negotiations. 4. Beware of the four square sheet that the dealer will present to you when you sit down to negotiate. This sheet maps out the purchase price, down payment, monthly payment, and trade-in value, which is how much you will get if you re also looking to get rid of a car you already own. By this point, the dealership has looked at your credit score to determine how much they will loan you, and at what interest rate. If you plan to take out a loan from the dealership, make sure you have a calculator with you to figure out how much monthly payments will cost based on the interest rate you are offered. If you plan to take out a loan from your bank, you can have the bank generate the interest rate you will pay before you go to the dealership, allowing you to calculate monthly payments and how long it will take you to pay off the loan. 5. Remember that every part of the process is negotiable, including anything from financing to accessories. If you re realistic about your offers, don t be afraid to try and get the best deal! 6. Once you make the deal, be sure to read over all of the paperwork thoroughly before signing any of the many documents you will be given. Make sure you understand all the terms and conditions of what was agreed upon because once you sign the papers, you are bound to the contract.

9 Which documents to bring to the dealership: If you want to test drive a car, you will need a valid license with you. If you re test driving an expensive model, you may need to put down a deposit, just so the dealer can understand you re a serious buyer. If you re looking for a price quote, bring any research documentation you ve gathered from consumer sites or other dealers. These documents will also help you negotiate if you want to settle on a price. If you want to get approved for a loan, bring your license, a current pay stub from your job, and proof of residence, such as a utility bill. If you want to sign all the paperwork and drive away in your new car, you should bring all the items mentioned above, along with your insurance card. Negotiating can be intimidating, especially if this is your first time making such a big purchase. I was so nervous I nearly sweat through my shirt by the time I got to the car dealership. Just remember that if you know the numbers behind the deal, you have the knowledge and materials to make a good negotiation. Extra negotiating tips: If this is your first time buying a car, consider accompanying someone else to the car dealership to watch them negotiate car prices before you do soon your own. If you don t know someone buying a car now, this video portrays car negotiating scenarios you might encounter. Appearance is important. The salesperson will take you more seriously if you are dressed appropriately. Negotiating and buying a car can take hours. Make sure you set aside plenty of time (and snacks) on the day you plan to buy. Bring a calculator with you to figure out how much monthly payments will cost based on the interest rate you are offered. Don t enter negotiations with a salesperson who intimidates you. If you feel uncomfortable at the dealership, request a different salesperson. If you want to avoid negotiating overall: My friend Jenny wanted to buy a used car. She didn t want to go through the stress of negotiating, so instead, she used AAA s Autobuying Experience online tool that lists the already negotiated prices of cars. This site is a great alternative for those not interested in negotiations on car prices.

10 Auto Insurance, a breakdown : As little as I knew about the car buying process, I knew even less about car insurance. I called my parents auto insurance agent to learn about coverage options, what I am required to buy, and what I should buy. Everyone who drives needs car insurance. The first step in understanding auto insurance is to learn about the types of coverage your insurance company offers. Your state laws may require you to purchase some types of coverage while other kinds are optional. Types of Coverage: Liability Pays for accidental bodily injury and property damages to others. Injury damages include medical expenses, pain and suffering and lost wages, while property damage includes damaged property and automobiles. This coverage also pays defense and court costs. Collision Pays for damages to your car caused by collision with another vehicle or object. Comprehensive Pays for loss or damage to your car that doesn t occur in an auto accident. The types of damages this insurance covers include loss caused by fire, wind, hail, flood, vandalism or theft. Medical Coverage Pays medical expenses, regardless of fault, when the expenses are due to an auto accident. Personal Injury Protection (PIP) Pays medical expenses for the insured driver, regardless of fault, for treatment due to an auto accident. Uninsured Motorist Pays for a car s damages when an auto accident is caused by a driver who doesn t have liability insurance. Underinsured Motorist Pays for your car s damages when an auto accident is caused by someone who has insufficient liability insurance. Rental Reimbursement Pays for a rental car if your car is damaged in an auto accident. A premium is the total cost of a person s insurance policy. There is no one standard price a person pays for auto insurance. The riskier the driver is, the higher the cost of the insurance. There are a number of factors that indicate to a car insurance company what your risk is, which determines what you pay for coverage. Your age: The younger you are, the more likely you are to be in an accident. Drivers under the age of 25 are at a greater risk of being in an accident than those over 25. Your gender: Statistically, women are safer drivers, making car insurance costs higher for men. Your marital status: If you are married you will pay less for car insurance. Where you live: Places with more traffic tend to see more accidents, making premiums more expensive in a congested city than in a less busy area. Your driving record: Getting in an accident or facing violations such as speeding tickets, DUI, and reckless driving will mean higher insurance costs. Some insurance companies will penalize you for your record for as many as five years from when the incident occurred. But remember, as your record improves, your coverage costs will go down. Your credit score: A high credit score means lower insurance costs; yet another reason it is important to have good credit when purchasing a car.

11 Also note that car insurance companies offer discounts for which you may be eligible: Multiple Policy Discount: This discount insures apartments and houses that have multiple insurance policies through the same company. Car Safety Discount: Anti-theft devices, anti-lock brakes, and passive restraint systems are often rewarded with a discount by the car insurance company. Good Student Discount: Full time students that meet certain grade requirements are eligible for a discount. Low Mileage Discount: If you drive less than a certain number of miles a year, you may be eligible for this discount. Car Loans: Because most people cannot afford to pay for a car fully at one time, financing is an affordable and realistic option to pay back the cost of the car. Financing a vehicle means that you will acquire a car loan and will pay it off with interest over a period of time. Without the option of financing my car, I would have had to take public transportation, and this story would have been about my journey of purchasing a bus pass. Riveting, I know! In all seriousness, as I mentioned earlier, your credit score plays a crucial role in this process. Credit determines how much money you are given in loans, as well as your interest rate. Lenders look at your score to determine your reliability, helping them decide how much to loan you and at what interest rate. There are a number of ways you can finance your car, including directly from the dealership, from a bank or credit union, or from a family or friend. By choosing to finance your car through the dealership, also called dealer lending, the dealership can choose to manage the loan itself, or might assign the contract to another party. The perks of dealer lending is that dealerships can offer special financing options, such as 0% financing, meaning you would have zero interest on paying back the car loan over a certain, determined period of time. Financing at a dealership is also convenient because you can secure the loan at the same place you buy the car. By choosing to finance your car through your bank or credit union, also called direct lending, you will receive the loan directly from a bank in order to pay the dealership the necessary costs. Some advantages of direct lending are that banks or credit unions will not pressure you to buy add on features or warranties, which a dealership might do, and they will most likely give you the most competitive rates. Plus, you may feel more comfortable working with someone from your bank that you know and trust, rather than a car salesperson you just met. If you choose to finance your car through a bank or credit union, you will need to contact the lender before you make the purchase on a car. You can also secure a loan through a family member or friend. Beware, however, that if the person loaning to you has any problems with money, you may face an awkward situation that could be avoided by choosing dealer or direct lending.

12 I chose to finance my car through direct lending from my bank. Because I have a high credit score, my interest rate was relatively low, only 0.9%, allowing me to pay back the loans over a period of three years. Understanding your options when financing a car is extremely important. Equally, if not more important, is a positive credit report. If your credit score isn t as high as you would like it to be, don t beat yourself up. Wait on buying the car and consider taking time to improve your score before making the purchase that isn t financially in tune with your budget. Conclusion: Buying a car comes with the great responsibility of understanding how to use your finances to make the most sound, smart, and safe purchase. Although you may want a car of your own right now, it s crucial that you devise a plan to pay for the car and all necessary costs from auto insurance to parking and gas. If you can t afford a vehicle now, figure out how much you need to save each month to make the purchase realistic. If you have a low credit report, work on improving your credit history to make you a more attractive borrower when you re ready to take out a car loan. Car buying is, without a doubt, complex, and for some, a totally daunting process. But if you understand what you want in a car, and if you re financially able to incorporate the purchase into your life, you can enter the car buying process feeling empowered, and ready and able to make this purchase a reality. A special thank-you to Rebecca (Reby) Silverman, 2013 JWI summer intern, for writing this booklet!

13 Life$avings Glossary of Terms Bumper-to-Bumper The most comprehensive warranty for new cars, which covers almost any part of the vehicle. Certified Pre-Owned A type of used car that is covered under a warranty that extends beyond the initial coverage that comes with a new car. Direct Lending A car loan provided by a bank or credit union. Dealership Financing A car loan provided by the car dealership. Down Payment A portion of money put down on a large purchase at the start of a loan to exhibit commitment to the purchase. Financing Taking out a loan on a car and paying it back, with interest, over a set period of time. Odometer Fraud When a car s odometer is rolled back, often times by the seller, so that the vehicle appears to have lower mileage than it actually does Premium Total cost of a person s insurance policy. Suggested Retail Value The price at which the car manufacturer suggests the retailer sells the vehicle. Trade-In Value The value that the car dealer will give for your car to put towards your new purchase. True Market Value The best price you can get for a car based on actual sales of cars to other buyers in the area where you live.

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