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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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37 Comments on "How to Buy a Car (The Ramit Way)"

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Gimena
Gimena
4 years 6 months ago

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.

Kathryn C
4 years 5 months ago
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… Read more »
Brandon Adams
Brandon Adams
4 years 6 months ago

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

Riley Cabot
4 years 5 months ago

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

Gimena
Gimena
4 years 5 months ago

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.

Tiffany Martin
Tiffany Martin
4 years 6 months ago
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… Read more »
Kate
Kate
4 years 6 months ago
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… Read more »
Todd
Todd
4 years 6 months ago

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).

Barkie
Barkie
4 years 6 months ago
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… Read more »
Robert
Robert
4 years 6 months ago

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.

Debora
Debora
4 years 5 months ago

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.

Tim Rosanelli
4 years 6 months ago
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… Read more »
Nick
4 years 6 months ago
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… Read more »
Susan
Susan
4 years 5 months ago
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… Read more »
Tim Rosanelli
4 years 5 months ago
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… Read more »
Tommy Walker
4 years 5 months ago

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?

Financial Advice for Young Professionals

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!

Brandon Adams
4 years 5 months ago

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.

Carmen
Carmen
4 years 5 months ago

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.

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[…] 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 […]

Jeff
4 years 5 months ago

“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

David Moore
4 years 5 months ago
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… Read more »
Paige
Paige
4 years 5 months ago

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 🙂

William Murray
William Murray
4 years 5 months ago
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… Read more »
Todd
Todd
4 years 5 months ago
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… Read more »
Jenni
4 years 5 months ago
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… Read more »
A-ron
A-ron
4 years 5 months ago
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… Read more »
Hilary
Hilary
4 years 5 months ago
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… Read more »
Jejune
Jejune
4 years 5 months ago

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.

Cody Wheeler
4 years 5 months ago

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

Annette MacKay
Annette MacKay
4 years 5 months ago
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… Read more »
Ivan
Ivan
4 years 5 months ago

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!

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4 years 5 months ago

[…] 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 […]

Rye @Payment Protection Insurance Claims/Reclaims

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.

Jesse Land
Jesse Land
4 years 5 months ago

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!

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[…] 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 […]

Dillon
7 months 20 days ago

I’m switching to Schwab from WellsFargo for checking and a friend brought up a point.

Should I keep a small account with a big local bank like WF to make the process of getting a car loan or mortgage (granted, far in the future!) a bit easier or is this anecdotal?

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