6 Lessons Learned From a Repeat Car Buyer

March 30, 2023March 30, 2023 ryan.renkey

It’s been a crazy last couple of months. I started my last semester of business school, accepted a job offer, went to Hawaii, and bought a minivan among other things. Despite the concerns around the pandemic coming into 2022, it was a great year personally and I was even able to accomplish some of my smaller goals like walking more. With everything I’ve been up to I have plenty of ideas for source material but first want to write a bit more about my recent car buying experience.

Apart from shadowing my parents in high school, I also purchased a car on my own back in 2017 so I’ve had a bit of experience to learn from and apply to my current purchase. While some elements like the prevalence of electric vehicles, implementation of new tech, and proliferation of non-negotiable prices (think Carmax) have changed over the last decade, many fundamental parts of my analysis have remained relevant. Based on my experiences and research here are a few things I’ve learned to keep in mind when buying a car.

Focus on finding the best transportation solution (and not necessarily a car)

Americans love to drive. We can see this by looking at our massive highways and interstates that crisscross the continent and perhaps because of this affinity for driving it’s easy to default to driving as THE transportation solution. Instead of starting with a solution (e.g., buy a second car) I started by considering why my partner and I were considering a new car in the first place. For us, the underlying catalyst was the approaching due date for our second child and the perceived difficulty moving an additional human’s worth of people and belongings. Reframing the problem in this light opened up possible solutions I hadn’t thought of before. Instead of buying a larger vehicle to accommodate my larger family, we might consider renting a minivan for longer road trips to Tahoe, Yosemite, or LA. Alternatively, if cargo was the only barrier, then we might also consider buying rooftop storage solution from REI to expand my hatchback’s limited storage capacity.

Ultimately, we found that a minivan best addressed our desires for more cargo space and easier loading/unloading of two kids and a dog and purchased a minivan to replace my wife’s ageing car. While didn’t choose an alternative transportation solution, the process of solving our transportation problem gave me confidence that we thoroughly explored all our options and came to a conclusion that made sense for our family.

SUVs to dominate the market. Don’t be deluded by the new normal

Over the last couple years it’s been hard to miss the chorus of voices talking about the jump in car prices. As a reader looking at images like the one below it feels like just the next large ticket item after housing to become less affordable.

One factor for this trend is the growth of the luxury vehicle market and that certainly explains part of the increase. Another primary factor appears to be the explosion of SUVs. Manufacturers have been cutting sedans from their lineup while adding smaller SUVs and crossovers to capture shifting tastes of American consumers. Take Ford Motor Company for example. Ford now lists only a single car underneath their “Cars” tab. Up until a few years ago you might have been able to find have been able to buy a Focus, Taurus, or Fiesta. However, today those same models are discontinued in the US and only available internationally.

A shift to larger more expensive SUVs and trucks and away from compacts and hatchbacks increases the average new car price even if the price of each model stays the same from year to year. To get a more accurate comparison to inflation it would be more appropriate to see how similar vehicle prices have changed. For example, if we instead consider how prices of the base model of the Toyota Corolla have changed over the last decade then we can see that the Corolla’s MSRP has increased below the rate of household income growth. This change could make for an entirely different narrative where average car prices have marginally exceeded the overall rate of inflation and are less expensive for a household than they were a decade ago.

Instead of following the new normal, a buyer could save a significant amount of money by buying a car that meets their lifestyle requirements. This is especially true given the quality of vehicles has only increased over the last couple of decades. With used car prices down from their peak pandemic pricing in January of 2021, there could be significant value in buying a used car.

Remember to include all taxes and fees when setting a budget

Taxes in California aren’t cheap and neglecting to include them in my quick budgeting exercise left me with an unpleasant surprise when I went to research vehicles more seriously. California isn’t alone, there are plenty of other states including Nevada and Kansas where the combination of taxes and fees can approach or exceed 10% of the car price. Sales tax is typically the largest of the various taxes and fees that must be paid when purchasing a vehicle, but the other fees shouldn’t be overlooked. As a former resident of Virginia, I don’t miss the whopping 3.96% vehicle property tax rate that must be paid annually. While Virginia has the highest vehicle property tax rate in the United States, there are several other states including South Carolina, Massachusetts, and Missouri with rates above 2%.

In my case these additional taxes and fees amounted to approximately 11.5% of our car’s purchase price. To put this number in perspective, consider the following example. For a $30,000 car with a 50% down payment this can be the difference between walking in an expectation of a $410 monthly payment and looking down at paperwork for a $516 monthly payment.

Consider a conventional gas vehicle (even in states with expensive gas like California)

Larger vehicles, minivans included, tend to get poor gas mileage. For example, a three row SUV or minivan with a conventional gas vehicle might average 18-24 mpg overall. So, when I saw that Toyota offered a hybrid minivan with 36 mpg, I was immediately interested. However, I was disappointed to find out that the hybrid models were only recently available and in ridiculously high demand. We couldn’t find any of the hybrid models available online, so my wife and I reached out to several dealerships who informed us that there were no new hybrid models available either! In fact, these models have a 12-24 month wait list to buy a new hybrid model with no discount to MSRP.

Even if we were willing to wait for up to two years to buy our minivan (fat chance with our kid on the way) and were fine with throwing $40,000 at a new vehicle, it still wouldn’t make a lot of sense for us. Outside of a few large road trips we put relatively few miles on our vehicles compared to the average American and end up averaging well under 10,000 miles driven per year. At our rate of use, the payback period for the hybrid model is well over a decade or more than twice what I would consider a reasonable payback period.

Test drive your new payment

Before I ever new what the final purchase price of my new car would be, I began saving extra money each month. Out of the monthly discretionary budget for items like dining out, clothes, and travel my partner and I stashed away an extra $200 monthly that served two purposes. First, it provided us with a way to bolster our savings for use as a larger down payment and second it gave us time to gauge how prepared we were to take on a car payment. As recent homebuyers, we had only recently begun to get used to our new mortgage payment so I was cautious about taking on any new debt. Test driving a car payment in this way gave me confidence that we could comfortably make a $300-350 monthly payment. In addition to its two defined benefits, test driving the payment also gave me more confidence in negotiating for a better deal. Knowing that we could come back in a month in an even better financial position gave me conviction to stay near my aspiration price which I had thoroughly researched.

There is no downside to asking for a better deal

Negotiating for a better car price can be intimidating, but it’s easier than you might expect. I’ve found when I ask, people are often open to reasonable requests, and this is even more true in car sales where there is an expectation to negotiate. The key is to make a plan for your negotiation before you ever set foot on the dealership. Here are a few simple things I have done and had success with:

Separate the test-drive trip from the purchase trip – Combining the two purposes means negotiating right on the heels of choosing to buy a car. This doesn’t give enough time to think about how to value the car and can place the buyer in a disadvantaged position relative to the seller who is always thinking about how to make the next sale
Do basic research like looking up KBB values for the car you intend to purchase as well as for any car that you intend to sell or trade in. Knowing where the market is conveys to the seller that you are an educated buyer and makes your negotiation more credible
Set an aspirational price that is modestly higher than the average vehicle selling price then make small concessions. Even if the dealer cannot meet you on price, they might offer discounted warranties or other benefits to try to make a sale
Negotiate at the end of the month when salespeople are looking to make their monthly quota or earn a bonus. Salespeople are more inclined to make a deal at the end of the month than at the beginning of the month
Remember that the worst that the seller can say is no. If the seller cannot or will not meet the price you are looking for then you are welcome to walk away from the deal. If you’re saving each month then you might be in an even better financial position with the next salesperson.

Closing thoughts

Attempting to purchase a car on short notice with no research will only setup a buyer for failure in selection as well as negotiation. However, in my experience buyers who research their purchase ahead of their test drive, have a plan for financing, set a budget, and are willing to negotiate are likely to come out with a fair deal. Readers, are there any tips that you feel could have been included?