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How to Buy a Car (The Ramit Way)

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Matthew from Overland Park, KS, asks: “I have a car that I’ve been making payments on for a little over a year and I want to get something else. Is it a good idea to trade it in when making another purchase?”

Matthew: You are what’s wrong with America!

Some points to consider:

  • I’m not one of those financial “experts” who says you can’t buy new cars…if that’s what you really enjoy and plan accordingly. In fact, I bought a new car, shocking online frugalistas everywhere.
  • However, whether your car is new or used, one of the biggest savings you can lock in is to buy a great car, then hold it for as long as possible. The math is compelling once you’ve made your payments. Yet Americans trade in their cars entirely too frequently for their financial situation, erasing any amortization and chaining them to a new car payment.
  • It’s NOT a good idea to trade it in to buy a more expensive car if you have credit card debt or haven’t built a conscious spending plan. This sounds obvious but you would be shocked how many people in CC debt decide it would be a good idea to trade their car in.
  • Before you trade your car in (or buy a new one), consider:
    • Have you maxed out your 401(k), IRA, automated finances, etc.?
    • Consider TCO “Total cost of ownership”: What about phantom costs like registration, gas, insurance, tickets, etc?

The Shocking Number That Almost Everybody Misses: Phantom Costs

Phantom Costs represent a huge, invisible portion of expensive purchases like a car. For example, when I used to have a monthly car payment of $350, my total out-of-pocket expenses (gas, insurance, registration, garage, etc) was $1,000.

From $350…to $1,000/month. Imagine how that affects your Conscious Spending Plan.

Almost nobody calculates TCO, so buying a car or house ends up being dramatically more expensive than the sticker price.

Yet there are ways to save big on a new car purchase.

If you’re thinking of buying a car, there’s a better way. I used this technique to buy my car at $2,000 under invoice. To get the exact method I used, see below for a mini-report I put together.

Sign up to my Insider’s List and I’ll give you a PDF report on how I got one car dealership to sell me a car at $2,000 under invoice without haggling.

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36 Comments

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  1. Ramit, you honesty is refreshing!

    Just one thing you forgot to mention, the sleazy people who sell cars. They try to talk you into all that bullshit you don’t need, gap insurance, undercarriage coating, etc.

    Thanks to the advice in your 10-year strategy, I set aside money for a new car every month, and I will never have to haggle over car payments at a dealership again.

    • I love haggling actually. This is why I like Ramit’s stuff. He makes it even more fun to haggle because I think he likes it too. I don’t think all car sales people are sleazy. The guys at toyota have been pretty good to me actually.

      I leased a BMW x5 about 6 months ago, my 3rd one. I’m a leaser not a buyer. But I’m over it completely, payment + gas = retarded.

      Just got out of my 3 year lease on swapalease.com, will break even in 1 month. Prius here I come. A non green, green person, just like everyone else in LA. Saving $500 per month. That means 125 more lattes each month for me. BAM!

  2. @Gimena: Paying cash doesn’t erase the value of haggling.

    • Gimena said she(?) wouldn’t have to haggle over the month payments, not the entire cost.

    • What I was getting at is than when you haggle over payments, they can do all sort of tricks, like extending repayment length, increasing the down payment, changing the payment frequency, to make you feel like you are paying less than you really are.

      If you are paying cash, you can only haggle about the price. Since there are less variables, I find it a lot easier.

  3. Tiffany Martin Link to this comment

    Yeah, this seems like a no-brainer, yet surprisingly many people do this! I’ve seen people who all work and the same company, make the same amount, yet some complain that they can’t afford anything, and some are able to feel financially comfortable. The only difference is that one will buy a 30k car every 2 years and the other has a 3k-5k car paid off that they’re running into the ground.

    It seems like people are really into the perceived status of having a new car (more than the reality of being financially set). It’s that status they’re after; they’re not car aficionados.

    (BTW I love that you mention toyota, honda, and subaru.)

  4. I will freely admit that I am vulnerable to certain messages from retailers & advertisers, but thankfully, the secret language of car ownership isn’t one of my weaknesses. I drive a well-maintained Japanese compact, and it never bothers me when I pull up at an award show or another glamorous event, among the BMWs & Mercedes, because I know I’ve gotten where I am because I put other things ahead of the purchase of a nicer car.

    I know Ramit talks about “conscious spending,” but it’s worth mentioning that one of the things to be conscious of is *how you think buying this thing will make you feel.* In my experience, cars are about the perception of status, and a belief that the owner deserves some intangible quality the car will bestow on them (comfort, respect, the fun of driving a zippy car, the pleasure of owning a beautiful object.)

    If buying a car for those reasons makes financial sense, by all means, go ahead. But if it would harm your financial situation, chances are you can figure out another way to get all of the above in another, more affordable way. Nothing will make you feel more respected than mentoring someone. A well-made pair of shoes can make you stand taller and feel better dressed. A week-long rented sports car will quickly remind you that 90% of the time, a zippy car is stuck in traffic with everyone else.

    We all have powerful unconscious needs, and honestly, there’s no point in arguing that we should ignore them, because as Ramit is so fond of saying, “try harder” pretty much never works. But just because companies spend a lot of money trying to convince us they know how to fill those needs, that doesn’t mean they have the only viable solutions on offer.

  5. Hilarious video! Love the brutal honesty. Keep it up. If I was Matthew, I’d be insulted but appreciative (after I mopped up my tears).

  6. Agree with all of your points, Ramit. Most people don’t factor in the indirect (phantom, to me, implies they occur without you knowing) costs, even after they’ve been paying them.

    If it helps paint a picture, because I track all of my costs and have a database to log all repairs/maintenance for my car I can share the TCO of my car:

    Car: 1999 Golf GT TDI
    Purchased: March 2008, 3rd hand. In working condition, but wasn’t properly maintained, so needed work to almost the value of what I paid for it done immediately after purchase.
    Purchase price: £2,850
    Repair/maintenance to date: £7,973.24 (including tyres, annual servicing & repairs)
    Interest portion of bank loan to buy & fix up car: £1,085.31
    Annual insurance & road tax: £1,842.52
    Fuel: £1,556.53
    Parking & fines: £588.76

    TCO after 4 years: £15,896.36

    Scary when you first work it out! :)

  7. Funny,

    The way I interpreted the question made me think this guy had already made the decision to buy another car, and that he was debating whether to trade the car in or sell it privately.

    Either way, the answer still stands; don’t do it. Always remember, it’s cheaper to keep her.

    • Is it though? What if he has a car with a high TCO and wants to switch to a car with a lower TCO. Like a more fuel efficient car. Or a smaller, cheaper car.

  8. Great advice. I have to tell you that when I started my business two of the best decisions I made were buy a old used car and moved a 1/2 mile from my business. I didn’t realize how much these two decisions effected my total cost of ownership.

    I bought a 1994 Mazda with 80,000 for $1500. I drove it for 7 years and put 120,000 miles on it. I just got rid of it because my auto mechanic said it would not pass inspection anymore because of body rust. First, most people don’t realize how much less you pay in insurance on an old car. Plus, with the short distance to my business, it saved me a ton on gas, insurance, and repairs. Imagine only paying for gas every four weeks and not paying for emission testing because you don’t drive enough miles in a year.

    The car didn’t look great but it was a great sacrifice when I was starting my business.

  9. Yes I agree with Ramit if you see a car as only a means of transportation. Buy a reliable, affordable car and keep it (I’d recommend Korean cars over Japanese as a value for money prospect, and American cars are much more reliable than before). However everyone is missing the point that cars are far more simple transportation. For many people it’s the most expensive thing they will ever own after a house. There is no rational reason to pay more for an Audi over a Toyota, but if you’re going to be keeping and using your car for years some people are willing to pay a premium to have a more comfortable and enjoyable place to spend their time. I drive a second hand Mini Cooper because it’s cute, fun to drive, and gets good fuel economy. I willingly pay more for increased maintenance costs, insurance, etc.

  10. I am 56 years old and have owned a total of 3 cars in my life. I started driving at 17, and live 30 miles from anywhere, so my cars keep going well into the hundreds of thousands of miles. My first car was an import (the same cheapo import one of the Car Talk guys owns). It took me 150,000 miles before rust killed it. My other two cars were not imports–they were Fords (I couldn’t afford imports). I maintained them regularly and they only needed minimal repairs (one starter motor, one belt, new tires–and that’s counting all 3 cars). My two kids learned to drive using my cars, so although I drive as gently as possible, they also were taken through the wringer by teenagers. They were even taken off-road (within the limits of the clearance from the carriage to the ground).

    Matthew, follow Ramit’s advice. If you have already ignored his advice, know this: call your insurance agent before you buy another car. The difference in insurance costs can vary incredibly based on some obvious things (safety options) and not-so-obvious things (color of car and numbers of thefts of the model and year of the car).

    Oh, and if you need the car for some “status event,” please be aware you can rent a luxury auto when you absolutely need to feel your very best (not that I’ve ever done this, but I have friends who have).

    Great video, Ramit. Thanks for telling it like it is.

    • Susan,
      The rent option is excellent advice. I’ve seen many people spend money for toys and never use them or barely use them. I remember a guy I worked with who complained all of the time about not having money.

      He liked Jet Skiing in the summer so he bought 2 Jet Skis for $20,000+ with a loan at 24% interest. When he complained about money, we would mention about the Jet Skis, but he didn’t feel they were the cause of the problem.

      BTW, talking about cost of ownership, he never rode his new Jet Skis because every time he when to the shore to use them something was wrong, the batteries were dead, the gas clotted the fuel injectors because it sat too long, etc. He would have been better off renting them for the few times he went to the shore even if it was extremely expensive to rent.

  11. Thank you for this :-)

    Now, I have to admit, we’re looking at buying a new (to us) car, because the one we bought has turned out to be a gas killer.

    I know that it was something that I really should have looked at before, but I was really really pigheaded about getting “this car” because I absolutely wanted it at the time, and there were not other options (as far as I was concerned)

    If we can keep our payments the same (insurance and everything else) would you think that would be a good idea?

  12. I think it’s important to pay cash for a non-appreciating assets like cars, engagement rings, etc. Set up a car fund now and start paying into it, that way you’re paying yourself and not some damn bank!

  13. It depends on the financing terms and the individual’s preferences whether or not it makes sense to pay cash or finance.

    My current car is financed at 0.9%, which is only going to cost me about $500 over the life of the loan. I don’t mind paying $500 to have a car now instead of later.

  14. My car just hit 110,000 miles and it’s still running strong. I’ve spent $2,000 on repairs and maintenance over the last two years which I am more than happy to have paid in place of my old monthly payments. I am so grateful for the freedom.

  15. [...] to themselves in the third person on a blog post. Anyway, a couple days ago, I ran a video of me ranting at a dumb question from one of my [...]

  16. “Cars are the worst investment you can make” – this seems like a timeless quote.

    Ramit describes it in such a fresh unique way though as always.

    Just wrote a post comparing his way of thinking to others like Tim Ferris. It is interesting to think about each of their messages:

    http://www.lifestylentrepreneurs.com/2012/03/personal-finance-hackers-lifestyle.html

  17. Ramit,
    Worst mistake I ever made was trading for a new car right out of college. I had a car that was paid for by my parents and it was only 4 yrs old. I got a job and bought a new car. It took me 25 YEARS to recover. It is just in the last few years that I now have my vehicle paid for. My truck is a 2003 Chev 1500HD. Bought used 20,000 miles and been paid off for 3-4 years. Only problem is 13 MPG. That sucks and is like a car payment. I fight the urge to trade for better mileage but could not pay cash for a new car so I’m driving this one into the ground.

  18. LOL! You just made my day Ramit! I’ve been driving my car for 10 years. Although I’m looking forward to purchasing a new car very soon, I’m kinda sad to let my old “hooptie” go. I do however, look forward to driving the next one into the ground too :-)

  19. William Murray Link to this comment

    Let’s assume the best of circumstances and consider someone who has used a personal budget to determine what they can afford and calculated the true TCO (including phantom costs) to avoid surprises. All too often, I think that person still goes out with the mindset that they will purchase the nicest/most expensive car they can afford. But what if they were to try a different approach and purchase the least expensive car they wouldn’t be embarrassed to drive? They could then save the difference in cost and put that toward their next car.

    Using my own life as a case in point, I calculated that I could afford $375/mo in car payments when I graduated from college. But rather than buying a car that might have cost $200/mo, I bought a car that cost $372/mo. Sure, I could afford it, but it wasn’t appreciably better than the alternative. And if I’d bought the cheaper car, then saved $172/mo over the course of my car’s life, I’d have saved an additional $2,064/yr (plus int). So let’s say that I had a 48-mo loan and kept the car for five years (I know it’s not 7+, as Ramit suggests, but it’s better than most Americans). At the end of that timeframe, I’d have $12,720 (48 x $172 + 12 x $372), plus whatever residual value my car still held. If I decided to put that toward a new car, that’s some down payment!

    Of course, there’s the added benefit of having a “pool” of money to pull from for unexpected expenses. Certainly better than putting repairs on a credit card instead, no?

  20. I very rarely comment but felt compelled today. He are 4 points for consideration. What’s your opinion?

    1. IS A CAR AN INVESTMENT?: Cars are NOT an investment. They are an (often necessary) expense. Investments appreciate. Cars depreciate. Period. Therefore, strictly financially speaking, it makes the most sense to spend as little on a car as possible. There is no exception to that. As always, life isn’t only a financial consideration so of course there other considerations (wants/desires) such as luxury, performance, comfort, fun, etc., etc. that come into play. That’s when you have to decide if those are valuable enough in your life to justify spending discretionary money on. (“Discretionary” assumes you have your finances in order.)
    2. BUY USED VERUS NEW?: Buying used is virtually always a better move financially speaking. New cars depreciate almost immediately after driving them off the lot. If you try to resell a new car immediately, it will be a challenge to recoup for costs. Of course there is a point of diminishing returns with used cars. Certain cars after they are X years old become very costly to maintain because they require constant repairs. That is often when they are 10+ years old however. (My 1998 civic still costs me very little in maintenance each year) Financially speaking, you buy used and keep the car as long as you can. When it starts to cost you more than $2k in maintenance for recurring years or becomes a hazard or you just can’t stand to pull up in it, it’s time to buy a new one.
    3. PAY CASH OR FINANCE?: First, you need to have confirm you’d have enough left in emergency savings after paying cash for vehicle. Assuming that’s true, the decision to pay cash is relative to what the current auto loan financing rates are versus what rate you can earn on your cash in some type of savings account. For example, if you can get .9% financing on a car but you can earn 3% on your money, it makes more financial sense to finance the car and continue to earn interest on your cash in the bank. This requires discipline however. You need to consider the cash spent because it technically is. If you don’t, you’ll end up using it for something else and still have the outstanding car debt. If financing rates are very close to or above cash savings rates, financially speaking you should pay cash.
    4. TOTAL COST OF OWNERSHIP: As Ramit said, many fail to consider TCO when purchasing. This are huge phantom costs often times around the following: deprecation (some cars retain their resale value better than others), taxes & fees, financing, fuel (your SUV will cost you), insurance (your luxury car will cost you), maintenance (is the standard maintenance required is more costly?), repairs (does that particular vehicle break down a lot?). Go to Edmund for a quick calculator to provide a guide for your assessment: http://www.edmunds.com/tco.html

  21. We’re a family of 5 driving a 1992 Honda Accord (and that’s it – no other cars) while my husband is in law school. We could justify a second car, but financially it just didn’t make sense, especially because we do need some loans to make it through school.

    It would be great to have a car with the kids while my husband is in school, but when you add up payments, TCO, and the stress of potential repairs if you purchase a used car, it just wasn’t worth it to us. We’d rather figure out ways to share the car and then be able to buy something new when the time comes that we can drive till it dies.

    The car runs just fine. We have had to do occasional repairs, and one major repair last year (A/C, muffler, tires, etc.) but other than that no major expenses, and our insurance? Only $23 a month.

  22. Cars, probably more so than houses, are a financial albatross. I know the lure of wanting to own a nice new flashy car, but they will literally sink you financially. That’s something “they” don’t tell you in the commercials or the brochure. I paid my current car off in 2008 with a loan from my 401k, which I’ve already paid back. It’s liberating knowing that I can run it into a tree at 100mph or drive it into a swimming pool or plough through an old folks home or a Wal-Marts and not have to worry about insurance covering the balance on the loan. My plan is to drive it until it explodes, or at least until some hot brawd offers to bang me if I buy a new one ;)

  23. Ok – I’m going to get a bit rambly here for a bit. I have strong feelings about cars (and electronics.)

    The only time a car is an investment is if it’s a classic and you know what you’re doing. Something that could sell at a Barrett Jackson auction if you know what I mean. For example it’s a personal goal of mine to buy a rough looking Corvette (C3 stingray body style, removable hard top) at some point, fix it up, drive it a little and either break even or better yet profit when I sell it. I know what the die hard vette owners are looking for – you can’t just put any old parts or paint on the car.

    Otherwise a vehicle is a means of transport (aka a tool) OR a toy. Neither is a wrong way to look at it.

    I was going to comment on the Prius mentioned above but hadn’t done the math in awhile. Looks like Edmunds has an awesome tool that calculates TCO for you for a 5 year period: http://www.edmunds.com/toyota/prius/2012/tco.html
    Starting in 2006 it stops including insurance and maintenance though in their calculations which skews things too much: http://www.edmunds.com/toyota/prius/2006/tco.html
    The cost of ownership on the Prius doesn’t fall as dramatically as other cars. But other USED cars still have a better TCO than a Prius so unless your goal is to use less gas, save the environment over saving money, it may not be your best deal.

    The vehicle I’m driving at the moment is an SUV (I previously owned a Geo Prizm LSI – Toyota Corolla engine, Chevy Body, $500 less across the board than a Corolla. And Corolla’s are cheaper than a Camry. Ramit: it’s ON hehe) and it was the equivalent of spending $50/wk including gas and all sundries which was well worth it. I owned it for 12 years and it was a 19 year old car when I sold it. And I was able to sell it for twice what I thought I should get for it. It was how I calculated that ~$50/wk ($20/wk in gas included.)

    With the ancient SUV I’m spending on gas but saving on home repairs by DIYing a 1950′s house. And you can get some amazing deals on craigslist if you have fast easy access to haul something.

    You need a vehicle that fits your goals, what you’re doing and where you live, not something suggested by society or even the generic TCO provided by Edmunds (though it’s kinda a nifty tool for a quick look.) Whether what you own is suitable for home improvement on the cheap or just getting from point a to point b and having some spending money left over, it needs to fit with what you’re trying to accomplish.

    I think most people overspend on both cars AND houses. They look at their max budget, often told to them by a bank, and go for that highest possible amount instead of really thinking about whether they want that really expensive car … or to have a cheaper car and still be able to save AND go out and enjoy and experience life. Life sucks when you have to worry if an extra $40 in gas is going to break the bank. :)

  24. I also find it hilarious when people get on a high horse and talk about buying a new prius or subaru for environmental reasons. Actually it is much more environmentally conscious to run your old car into the ground. Buying new cars every other year is financially and environmentally inappropriate.

  25. Wow! Hilarious. Very entertaining but also some very excellent points, you’ve inspired me to write a post to backup your points. Kudos dude!

  26. Annette MacKay Link to this comment

    Couldn’t have said it better myself. I once ranted on a young bagger at the grocery store. As we were walking out to my car he was telling me how happy he was with his new job because now he could afford car payments – he had his eye on a new Honda. He was barely a day over 17. I tried to be gentle. ;-) I hope I convinced him to look for a reliable junker. At the time I was driving a serviceable 20 year old van, that I eventually drove into the ground. We gave it away – wasn’t worth selling.
    Until 3 years ago, I was a used car girl. Now at 50 with my financial house well in order I have a new car. It is quite a treat. Paid cash.

  27. Great video! And a good call because I was actually thinking of doing that, well more like 30% inclined lol but I like the way you present the issue or respond to it. I’m glad I bought your book!

  28. [...] And Why You Should Too CNN Money | There is No Student Loan Crisis I Will Teach You To Be Rich | How to Buy a Car the Ramit Way Kiplinger | 10 Personal Finance Blogs Worth Reading Out of Your Rut | How Much is Your Job Costing [...]

  29. This is great advice – I learned a lot even though I have no plans to trade in my car. I would rather spend a reasonable amount of money for a car that I know would last a long time. Unlike these other people, I don’t bother myself with keeping an image that I cannot afford.

  30. Indeed! My 2001 Toyota Sequoia has 285,000 miles and it’s still going strong. (And still looks new, I might add)

    Oil changes, brakes and air filters… that’s been it for maintenance.

    Keep your cars, people!

  31. [...] And Why You Should Too CNN Money | There is No Student Loan Crisis I Will Teach You To Be Rich | How to Buy a Car the Ramit Way Kiplinger | 10 Personal Finance Blogs Worth Reading Out of Your Rut | How Much is Your Job Costing [...]