Spring Survey: Consumers Plan to Buy Cars Despite Costs

A new Freedom Debt Relief survey discovered that 85% of consumers expect to make a big-ticket purchase within 12 months. When asked what they would buy, the most popular responses were:

• Vacations (30%)

• Vehicles (27%)

• Furniture (23%)

Vehicles are challenging because of soaring prices, supply chain issues, and increased short-term interest rates. This article covers ways to save when you buy and finance a car in 2022.

Step 1: Going Big Without Going Stupid

Cars are more expensive than most furniture or vacations, so impulse buying is probably a bad idea. If you need (or just really want) to buy a car in the next year, start planning now:

• How much can you afford? If you plan to pay cash, don’t deplete your savings or derail your retirement planning. If you’ll be financing, budget an affordable monthly payment. One popular rule is to spend no more than 20% of your annual gross income on a car.

• Once you have a budget, stick to it. If necessary, enlist a budget buddy to keep you honest when you go shopping.

• You can afford a more expensive car on your budget if you choose a longer loan. But avoid a loan term that exceeds the useful life of the car – about five years. 

• Remember that the main purpose of cars is transportation, and they are available at many price points. Don’t get in over your head trying to impress people.

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Step 2: Choosing a Car

Once you know what you can safely spend, you’ll choose an affordable vehicle that meets your needs. 

• Research price, features, safety, mileage, and reliability. Consumer Reports is a good starting point.

• Make sure the vehicle fits your lifestyle because early depreciation and trading in cost money. You might yearn for a tiny sports car, but your family will hate you if you sardine them on every road trip. 

• Consider all ownership costs when comparing cars – repairs, maintenance, gas, and insurance. Check out the Edmunds.com cost of car ownership calculator to compare the annual expenses of different makes and models.

• Understand that there might not be much savings in today's market if you choose a late-model used car over a new one.

• For used cars, get a CarFax, VINCheck, or AutoCheck report to see the vehicle’s history before committing.

• Experts recommend a pre-purchase inspection from a licensed mechanic, even if a used car is “certified.” Expect to pay about $150, but it could save you thousands in repair bills.

Step 3: Shopping for the Best Price

The first thing you’ll need to get over in 2022 is expecting to find bargains. According to Money Magazine, the supply of new vehicles won’t return to pre-pandemic figures until at least 2023, and the current shortage will continue to keep new and used car prices high.

However, there are still ways to save money on a car purchase:

• Be flexible about your make, model, and color. Have a list of cars you’d be willing to accept and be ready to compromise on anything that isn’t a deal-killer.

• Expand your search to big and small dealers, rental agencies, out-of-town (or out-of-state) dealers, and (for used cars) private parties. 

• Use the internet to see more cars in less time, and set up alerts or notifications on the sites you visit. 

• Be prepared to move fast. That means no back-and-forth negotiation. And plan to pay cash or have preapproved financing. If a dealership or individual needs to unload a car quickly, the price will likely be a little lower. But they won’t sell to you if you can’t close the deal and pay immediately.

• You can offset some of today’s hefty price increases if you have a trade-in because their prices are also higher. Look into selling your old car versus trading it in because you may clear hundreds or thousands more by doing so.

• Negotiate for extras. Dealers may not be willing to drop their prices, but you may be able to negotiate some high-margin freebies like extended warranties, cheaper financing, or free oil changes.

• Don’t get into a discussion about monthly payments. In the budgeting stage, you should consider how an affordable payment translates into a broad price range. However, don’t disclose that amount to a salesperson. It’s easy for the pros to manipulate buyers into spending more by getting them to focus on a monthly payment instead of the total price. That’s how people end up with ten-year loans for cars that fully depreciate in five years.

Step 4: Borrowing for Less

Financing (fees and interest charges) is often a significant cost when you buy a car. Unfortunately, rising interest rates are making this component more expensive. You can find ways to pay less, however.

• Check your credit report and FICO score before shopping. You won’t know what interest rate is fair unless you understand your credit profile.

• If your credit report contains score-reducing errors, clear them before shopping for a car.

• If you don’t need to buy immediately, work to improve your credit score. Even a few points can make a big difference, according to FICO’s Loan Savings Calculator. For example, increasing from the 660-689 range to the 690-719 range can save you over $2,000 during the life of a $30,000 five-year loan.

• Line up financing in advance. Get quotes from several competing lenders, including credit unions and banks, auto financing companies, and secured personal loan providers. 

• If you have a home equity line of credit (HELOC) with a reasonable interest rate, that can be a good option. Just calculate a payment that clears the balance in five years. Financing a car over 15 years costs a bundle, even if the interest rate is lower.

• There are several moving parts in auto financing – vehicle price (minus rebates if you get them), interest rate, and loan charges. When comparing offers, add up the total cost over the entire life of the car – down payment plus loan fees and anything else that you pay upfront plus the total of all monthly payments over the loan term. The lowest amount wins.

Step 5: Play a Waiting Game

One strategy you might not want to hear is to keep your current ride for another year or two and buy when supplies increase and prices come down. Because the best car for you might not be the one with all the bells and whistles – it’s the vehicle that you can afford.