By Matt Knoll, CFP® Sr. Financial Planner
If you’re considering buying a new car there’s a lot to think about. Buy or lease? Make and model? Gas or electric? White or silver? It can lead to decision fatigue. Another challenge is that inventory at dealerships is down in the wake of the pandemic. Given the law of supply and demand, that means prices are up, so it’s more important than ever to have a good idea about what you want before you step foot on a lot. To help you do that, let’s break down some of the choices you’ll face on the road to getting your new set of wheels.
Set a Budget
The first decision you should make is how much you can afford and how the purchase will affect your overall financial plan. Whether you intend to pay the full price in cash up front, or you plan to secure a loan and make monthly payments, settle on your price range in advance.
Credit Score & Financing
Knowing your credit score will give you a good idea of what interest rates you qualify for when it comes to financing your auto loan. Also, to find the most competitive rates, shop around with local banks, credit unions, and car dealerships before signing on the dotted line.
Buy vs. Lease
According to Consumer Reports the number of people choosing to lease versus buy has risen over the last few years. The deciding factors are based on individual preferences such as those in the chart below. Take a look to see which category you fall into.
| Buy | Lease |
| I hold on to my car for a long time | I enjoy getting a new car every few years |
| I drive a significant number of miles each year | I don’t put a lot of miles on my car each year |
| I don’t mind maintaining an automobile | Safety is a priority, and I don’t want to be responsible for maintenance |
| I want the vehicle as an asset on my balance sheet at the end of my loan payments | Having a reliable car is important and I do not consider my vehicle to be an asset |
Shop Around
Based on your budget, research the cars you’re interested in before going to the dealership. Having a list of vehicles that you like and that fit your needs makes it easier to compare prices and options. Since inventories are low, knowing what is currently available at various dealerships can also give you negotiating power when it’s time to make an offer.
Current Vehicle Trade-In Value
Have you looked at used car prices lately? You might be shocked to know how much the vehicle you currently own is worth. This is the upside of the current car shortage, because prices for used cars are rising faster than new cars. According to the US Bureau of Labor Statistics used car and truck prices hit a record high in January of 2022. While used vehicle prices have come down in the past couple of months you may still have an appreciated vehicle value higher than you expect. Using tools like Kelley Blue Book can help you gauge the value of your used car and reduce or eliminate haggling at the dealership.
New or Used
Normally, buying a one- or two-year-old car that’s coming off lease is a smart move because new vehicles depreciate 20-30% by the end of the first year, but current market conditions have turned that thinking on its head. With prices for used cars rising faster than new cars, it may now make more sense to buy a new car with a full warranty. However, don’t expect this to be the case indefinitely. As the auto industry addresses the reasons behind the shortage, such as a global computer chip shortage, increased labor and production costs, and supply chain delays, inventory will rise and car prices will return to normal.
Make an Offer & Beware of Add-Ons
Once you’ve considered your options and know which cars you’re most interested in buying, research the Manufactures Suggested Retail Price (MSRP) for each. Now you’re ready to negotiate. When you make an offer, don’t be afraid to let the salesperson know that you’re prepared to walk away. Also, beware of add-ons that drive up the costs by making you pay for things you don’t really need, such as paint sealant (paint doesn’t need to be sealed) and rust-proofing (all cars are essentially rust proofed). Throughout the negotiation, keep your budget in mind and stick to it.
It can seem like a lot of work but driving away in a new car that you like and can afford is a great feeling. If you have questions about what’s a good budget for you, or which financing options make the most sense contact your TPC team. We’re ready to help.
Matt Knoll, CFP®,, is a Sr. Financial Planner in the Quad Cities office of The Planning Center, a fee-only financial planning and wealth management firm. Email him at mattk@theplanningcenter.com.
