BUYING A CAR

The Budget

Buying a Car
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"Those who expect to reap the blessings of freedom, must, like men, undergo the fatigues of supporting it." -- Thomas Paine

Cars are not simply a means of transportation, they are our wings of freedom. They allow us to move about freely, and that is the reason they have become THE dominant consumer product in North America. When we examine this product's pricing system, though, we see that the wings can quickly become shackles. An unthinking consumer can quickly and unknowingly become buried in a vehicle, thus making it impossible to enjoy the liberation that a vehicle can deliver.

From a strictly practical standpoint, a car is nothing more than a means to get us from point A to point B. So why do prices range from less than $10,000 to more than $500,000 for a product that does something so straightforward? Simply because we as consumers have demanded it!

Demand is the key issue here; and since we've demanded it, the automobile manufacturers have supplied it. This has created a minefield... er, marketplace, through which a Foolish consumer must tread with great care.

For some, money is no object. For the rest of us, though, a method of financing the purchase is at least as important as the choice of the vehicle itself. Given the fact that cars are not investments, even individuals with a hoard of cash may find financing appealing, since their obscene wads of dollars would do better if invested elsewhere.

What with the large costs associated with purchasing a vehicle -- be it new, used, leased, or financed -- the Foolish consumer is best served by first setting up a budget for these costs. It may seem that budgeting opens a Pandora's box into which time disappears, as light into a black hole. In the long run, though, budgeting will more than pay off in our car-buying quest (as well as in our larger financial picture).

The budgeting concept is one that can be difficult to master and exercise on a daily basis, but the resources available to you in our Fool's School are vast and practical. Remember that in the second of the original 13 Steps to Investing, that, yeah, the Fools saith, "Settle your personal finances first." This applies just as directly to buying a car.

Budgeting is all the more important because the costs associated with owning or leasing a vehicle don't end when the vehicle is delivered or the loan is paid off. In fact, possession is just one phase of the car cost cycle. Costs, including repair and maintenance, gas, insurance, plates, taxes, and registration, can all add up very quickly. The key common sense issue of affordability, in other words, must be examined both at purchase and over the life of the vehicle.

How can life-of-the-vehicle costs be minimized? Take the example of a car buyer who has a teenage driver. In this case, insurance certainly becomes an issue. Sure, that coupe looks sporty, feels sporty, and probably is sporty, but what are the annual insurance premiums compared to the family sedan that may even cost a few more dollars at the dealer's door? A simple phone call to your insurance agent may just save you from the car cash coffin down the road.

As a matter of fact, such trade-off decisions may save you more than working that dealer down to the last bleeding penny at the time of sale. The need to step back and look at the big picture is critical, especially when taken in the context of long-term ownership.

If you know your net worth, your assets, liabilities, and cash flow, you're well on your way toward building a budget. You may find it useful to use software tools such as Quicken for this purpose. You may want to spend a few moments using our calculator that asks: What car can I afford? You may also want to avail yourself of other resources. For instance, you could call your banker and ask him how much money he would be willing to loan you for a vehicle. That decision will be based on a lot of factors, including the above-mentioned net worth, etc., and your credit history. With a little bit of preparation and some telephone aerobics you can gain a great deal of knowledge about what a financial professional believes you can afford. Your banker may even step you through the process, lending a helping hand with budgeting.

Heck, if nothing else, while you have that financial person on the phone, ask them about the value of your old car. Say something along the lines of, "What is the blue book on a 1994 Foolish Go-Kart DX-Z9 with the Supercharger; it's in good shape and has 38,000 miles?" A working relationship with this person will help you when you call back later to ask what kind of value a particular car might be expected to hold over time.

If you get the anti-theft system installed, will your insurance agent give you a break on premiums? How about ABS? Remember that the financial professionals you consult have a vested interest in your finding the best vehicle for yourself. So treat them as your own personal team of car-buying consultants. Remember, too, that a little planning and phone work may save you big bucks down the road.

At this point we'll leave you to tinker with some other calculators that will help you figure if you should finance or pay cash, what your monthly payments will be, how much you should put down, what term of loan you should consider, home equity vs. auto loan, and rebate vs. dealer financing. We'll provide this list again in Step 11 when you're ready to make financial preparations.

Finally, be patient. The supply of cars is almost endless; those vehicle assembly lines spit cars out as if they were Hershey kisses on Valentine's Day. Now, on to Step 3, finding the right car for you.

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