“Never buy a new car” is advice most of us have probably received at some point in our lives from someone with a little financial wisdom to share. Earlier on in my career, the majority of people that I advised and spoke to were regular, middle-class folks, and I can recount at least half a dozen times when someone lamented about making the mistake of buying a new car. One story, from someone I can’t even place anymore, goes something like this: after buying a new car while he was in college, his father got so mad when he got home that he demanded he immediately return the car and cancel the loan. Apparently, car dealerships do honor their promise to fix your buyer’s remorse because I remember this client telling me that he did get to back out of the purchase.

Historically, in spite of what you read, buying a new car is mathematically not a good deal for one very simple reason that you may already have guessed: depreciation. As soon as you buy a car and drive it off the lot, there is an exponential decrease in the value of the car. From then on, the value of the car decreases at a linear rate. You are better off buying a car that is a month old because the immediate loss of value has already been subtracted from the price you paid for a month-old car. Are there exceptions to this rule? Of course. Maybe you are able to find a car in one city and take it to another and make money. Or, maybe you are able to take advantage of price arbitrage as it pertains to car dealership prices. I’ve seen it done, but it’s a lot easier said than done.

Now, the title of this blog is How to Buy a Car in 2022. Things are a little different now: used car prices are through the roof and aren’t expected to come down any time soon. This is yet another symptom of inflation that we are going to need to live with for a couple of months (or years). Let’s take a look at the Toyota Highlander. On Tuscaloosa Toyota’s website, the MSRP of a 2022 Toyota Highlander is about $45,000. A quick search on Cars.com shows some used 2021 and 2022 Highlanders going for similar prices - some are asking even more than the cost of a new highlander. Now, you might be thinking that a seller will take less on the used car. That’s true, but I would counter by saying Tuscaloosa Toyota will take less on their new car too (I know from personal experience: they will come down). The only other explanation for the cost parity is, of course, related to availability. New inventories at dealerships are often limited and choices are smaller, but I believe you should try to be a little patient and selective when making a big purchase like this. By being patient - and not impulsive - you can get a really good deal on a new car.

Once you decide on the new car, this is where you make or lose your money. There are a few critical steps you need to follow.

1. Decide how you will pay. You have two options: 1. Pay cash 2. Finance (aka take out a loan). Regardless of which suits you better, you should be prepared to walk out the door with a car loan from the dealership. Why? Most likely, you will be able to get the best possible deal if they know you are going through their financing department. Car dealers make money in two ways: 1. Selling cars 2. Selling loans (there’s actually a third option we’ll get to later). Even if the dealer can’t make a ton of money on the sale of the car, they can always count on making money off the interest charged over the life of the loan. Are you thinking to yourself that it doesn’t matter if you finance or pay cash to get the best possible deal? Try this: offer to finance the car from the very beginning. Once everything has been agreed upon, offer to switch things up and pay for the car with cash. Either the dealer won’t mind or they’ll be very ticked off. There’s your answer.

2. Find a Good Credit Union. Unless your dealer is running some sort of 0% interest special (rare in this environment), you’ll want to avoid financing with the dealership. Odds are, you can find a much better deal through your local credit union. If you have a good relationship with a banker, see what they can offer you on a simple interest loan. My personal preference has always been the Alabama One Credit Union. Shop around with 2 or 3 credit unions until you get the best one. Before you apply, you want to reach out to the Credit Union and inquire about what kind of rate you can expect for your credit tier.

3. Purchase the Car. Remember, you want to finance the car through the auto dealership’s finance department. We’ll get to why that is in the next step. But first, you want to avoid buying any unnecessary extended warranty coverages offered by the dealership when you go to sign the final paperwork (this is the THIRD way dealerships make money). Once you and the salesperson agree on the terms and shake hands, some dealerships will move you on in the process to another person, one of their top salesmen, who will do everything in their power to sell you on some extended coverage options for your new vehicle. Mathematically, these deals are not great in just about every case. If you feel the need to add something at this stage, be sure to think twice and understand what you’re buying. If you want to be great with money, you’re going to have to learn to self-insure some risks associated with living. Otherwise, you’ll be overinsured until the day you die.

4. Refinance the Car Loan. Typically, you will not receive your first car payment notice until 30-60 days after the purchase date. As soon as you get that first bill, you want to send it to the Credit Union you chose in step 2 and have them pay off the car dealership’s loan. Now you will have a car loan through a Credit Union with much more favorable loan terms.

That’s pretty much it. The key to buying a new car today is understanding what the current marketplace looks like and how the game is played. One thing I didn’t discuss in the article is car insurance. You want to take a look at a good insurance policy before you make any new car purchase. I’ll save the topic of car insurance for another blog post. Car insurance rates are based on a number of factors, but the rates are always changing. It pays to check the marketplace at least once per year to see what different options are out there. If you’re interested in reviewing your current policy to see what exactly you have or if you can get it much cheaper through one of our contracted companies, give us a call at (205) 210-9835.