Buying an Auto

Early on in life, once you get out on your own, one of the most exciting things you can do is buy a car.  It
doesn't make a difference whether it's new or used; this is always a tense, exciting and frustrating experience.
Just as with an apartment, the selection of a car can involve many of the same factors.  The additional costs
associated with a car have more potential problems than an apartment.  Purchasing a car involves a series of
steps, just like an apartment:

While having a car sounds great, the smartest choice is always to not spend money if you have a choice.  A car
is wonderful if you  have a need and the financial capacity.  However, many people don't need a car to exist, if
you can get an apartment close to your job and shopping and eating is within walking distance, then a car is
going to be a fixed expense no matter how often you use it.  Some people say they need a car occasionally and
the response should be to rent a car for the days you need one.

The point is that a car is a fixed expense so avoiding this expense will save you money.  If you live in a big city,
the problems with a car extend to traffic congestion to finding a parking place (just because you have a car
does not mean a parking spot will always be available).  There are options to owning a car and these should be

Before beginning any search for a car, start with an understanding of your current financial position.  Work with
a professional whom you trust instead of someone on the car lot that is more interested in making a car loan
(and the associated commission) than your best interests.  A loan professional in a financial institution can help
you understand the limits you should put into place based on your income and ability to support payments.  
Often, after this discussion with your financial institution professional, you can complete a loan application and
be given a pre-approved loan amount.  With the pre-approval in hand, you can go out and find a car in that
price range and complete the transaction with confidence.

There are a number of considerations to review in the selection of a car.  

      -        New versus Used: There is an old saying which states that a new car loses 20% of the value once it
is driven off the car lot. This is the impact of the status change from New to Used. While both cars may serve
the same purpose and offer an ownership satisfaction, a New car is a New car.  So the question becomes,
which is the better value?   
      -        With a new car, there is a new car warranty.  Often the dealership will try to justify the price because
of the warranty.  Often, a number of dealer add-ons increase the price of the car.  One of the best is clear
coating (intended to protect the paint).  If you keep the car clean and apply wax and polish as recommended,
this option provides no benefit.  

      -        With used cars, it is your responsibility to make sure that there are no problems with the car, even if
the dealer claims that you have a warranty.  Always take the car to a trusted mechanic before purchasing.  The
mechanic will perform a diagnostic test on the car, looking for any existing or potential problems.  Yes, there is
a charge but this step may save you hours of problems in the future by finding problems that are hidden today.

      -        While it may not be a common practice, negotiation is available in most car dealerships.  Do not be
afraid to walk away from a car, no matter how much you want it.  Call around to other dealerships in the city or
outside the city and ask for a quote.  Be ready to tell the dealership exactly what you what.  It is your
responsibility to get the best price possible.

      -        Size: Consider how you will be using the car while you own it.  If there will be a need to transport a
number of people on frequent occasions, then four doors may be needed.  If you would rather not be hauling
people around, look at a two door.  Will there be a need to haul items?  Would a pick up or a van be a better
value?  How about the difference between a sub-compact, a compact, a standard or full sized car?  

      -        Power: Here again, consider how you will be using the car day to day.  Will there be a lot of mountain
roads?  Will there be a need to haul a trailer?  Will there be a lot of freeway driving?  Often a small engine will
satisfy city driving but may not have the power to handle steep mountain roads.

      -        Hybrid: This is the new technology in vehicles.  A hybrid is the same overall styling as a regular
vehicle, but the drive system is different.  While these systems provide a higher mileage than their
counterparts, the technology is still evolving.  A hybrid works better with smaller cars than larger, so you may
want to look at a compact for hybrid choices.

      -        Mileage: Over the life of any vehicle, this is one of the biggest cost factors.  Getting 12 miles per
gallon versus 24 miles per gallon can add a significant expense difference month in and month out.  If gas is
priced at $2.759, what is the cost difference for 1,000 miles driven when getting 12 mpg versus 24 mpg?

      -        Insurance impact: Here again, before making the decision, a meeting with your insurance agent may
be worthwhile.  Insurance rates are based on the vehicle driven and how that vehicle is rated within the
insurance industry.  A flashy, high power Mustang sports car will normally have higher rates than a Honda Civic
and the difference could add up over time.  Note that there are a number of insurance companies that can now
offer help in getting a car loan.  It never hurts to check all the options before committing.

      -        Projected Maintenance: The next impact is the long-term maintenance costs.  A car needs regular
maintenance and service to keep running at its peak performance.  Here again, spending time with a
trustworthy mechanic may be useful to determine the best options in controlling the maintenance costs.  Be
sure to budget for a fixed dollar amount each month, to be set aside, for performing maintenance.  Follow the
mechanic's suggestions and the vehicle life can be stretched.  The current technology in engine design and
vehicle structure has extended the potential life of a vehicle, as long as the proper maintenance is performed.

There are actually two agreements here:

      -        Purchase Agreement: This part of the agreement is a transfer of ownership from the car dealership
to you.  In this paperwork, the title of the car is transferred, along with making you responsible for the future
registration fees and taxes (charged by the state for the right to license a car in the state).  Each state has a
slightly different process and fee structure, but the basic set-up is always the same.  Each car is provided a
license plate which makes the identification of the car unique.  Needless to say, fraudulent activities relating to
license plates are illegal.  Also, ownership of the car creates a potential liability issue and you are required to
maintain insurance on the car to protect others from your potential mistakes or accidents.
              -        Please be aware that when a car is purchased from an individual instead of a dealership, you
are required to complete the needed paperwork to complete the transfer of title.

      -        Finance Agreement: If you have worked out the purchase with a financial institution in advance, then
this paperwork will be in conjunction with the financial institution instead of the car dealership.  This
documentation creates a legal obligation for you.  The lender will treat the car as collateral for a loan.  The
payment structure will be defined in the documentation.          
              -        If you paid cash, this section is not needed.

Today's car can be expected to last for years and can be operated for hundreds of thousands of miles if
maintained properly.  Most cars come with an operating manual that includes a table of the recommended
scheduled maintenance to keep the car operating in peak efficiency.  Ideally, you should find a mechanic that
you can trust and use this same person for all or most of the work on the car.  A good mechanic is interested in
keeping the car running as long as possible and will keep you informed of the potential issues that he has
observed, then help to schedule the next maintenance to make sure that the car is kept in the peak operating
level.  In order to keep from being impacted by a repair bill, the best solution is to set money aside each month
for car maintenance, even if nothing is being done.  A couple of months can go by with no cost and then the
next month may require hundreds of dollars.  Your mechanic can help you to estimate the potential costs over a
year so this amount can be put in the budget.  While a new car may have lower maintenance costs, the extra
paid for a new car can often offset the difference.

Many, if not all, states now require a car to be covered by insurance.  The required minimum insurance is
liability insurance, which is intended to protect the other person in case of an accident. Actually, there are
different types of insurance your car should have (you can pick and choose some of them):

      -        Liability: This portion of the insurance coverage package is designed to provide a way for someone
else to recover the cost of damages from an accident where you are 'at fault' (currently many states require this
insurance).  Since you are the owner of the car, you must be responsible for the insurance without regard to
who is driving (so be careful about who else drives your car as you are responsible for the damage caused).  
There are two components to this insurance:
              -        Bodily Injury is intended to pay the medical costs of the occupants of the other vehicle when you
are at fault.
              -        Property Damage is that portion of the insurance which will repair the property damage caused
by your vehicle, whether it is to another car or a telephone pole or a wall.    

      -        'At Fault' is a term which indicates who is responsible for causing the accident.  In the case of hitting
a telephone pole, then the responsible party is the driver (the telephone pole wasn't moving); in the case of
another car, then whichever driver was not following proper protocol will normally be the one at fault.  Assume
that one of the drivers was exceeding the speed limit and that caused the driver to fail to control the car.  In
other cases, the driver of one car is attempting to get through the stop light before it turns to red (already
yellow) and hits another vehicle.  How about running a Stop Sign or Failing toYield or Driving Under the
Influence or Rear Ending another car?  In theory, if each driver performed perfectly and all cars were kept in
perfect running order, then there would never be an accident.  But there are accidents so we must assume that
either the driver failed to perform perfectly or the car was not in perfect running order.  In either case, the
owner of the car that caused the accident will be held responsible.  The smart thing is to always be the guy not
at fault.  You perform your driving skills perfectly and keep your car running perfectly, buckle your safety belts
and drive defensively.

      -        Collision insurance is intended to take care of your car in case you are at fault in an accident.  
Assume that you miss the brake pedal and drive the car through the garage.  You are at fault and there is no
one else involved so Liability Insurance won't help you. Collision insurance will take care of you in an accident
when you are at fault, but it is only for the damage to your car, not damage to you physically (the damage to
the garage is covered by your home owner insurance if it is your house or your car liability insurance if it is
someone else's house).    This coverage requires that you have a deductible (where you pay for the first
dollars spent and the insurance steps in when you reach your deductible limit).

      -        Comprehensive insurance is intended to take care of your car in case something happens where you
are not at fault, but neither is anyone else.  If you have ever had your windshield hit by a rock on the road, then
comprehensive insurance will take care of the car damage.  If you live in tornado country and your car is
damaged during a storm, comprehensive insurance will step in and take care of the car damage, not damage to
you.  This coverage requires that you have a deductible (where you pay for the first dollars spent and the
insurance steps in when you reach your deductible limit).

      -        Bodily Injury coverage would be the car version of medical insurance.  This insurance is designed to
cover your medical costs (and the costs of your passengers) in case of an accident where you are at fault.  

      -        Uninsured Motorists: Lastly, consider the need to protect yourself and your property when the other
driver does not have the proper insurance coverage (breaking the law).  This is often referred to as 'Uninsured
Motorists Insurance'.  While in the perfect world, this would never be needed, there are people that drive cars
illegally and, while not many, still should be a concern for you in protecting yourself.

      -        Deductible Waiver is an additional coverage with this insurance.  This coverage pays for the
deductible if your are damaged by someone without the ability to pay.

      -        Bodily Injury should also be considered for this insurance.  Here again, you need to make sure that
the insurance pays for medical costs if the driver at fault cannot pay.

      -        Property Damage is the portion of the insurance that will pay for your car repairs when you are not at
fault and the other driver cannot pay.

      -        Please note that the above coverages may be grouped together or sold separately, verify the
coverage with the insurance company.

      -        Other Coverages: This is a group of add-ons that insurance companies can either include with the
policy or charge an additional fee for the coverage.  This group includes:
              -        Rental Car Coverage: When you rent a car while away from home, does your insurance
automatically cover the rental also?
              -        Emergency Road Service: Who can you call when your car breaks down or runs out of gas?  
There are a number of places to get this service and it can be very useful when away from home.
              -        Accident Rental Car Reimbursement: Assume you have been in an accident and your car is in
the shop for the next 12 days, does your insurance provide a rental car or is this going to be an additional cost
for you?

      -        There are other items that your insurance can provide, so it never hurts to ask.

Insurance Rates (the amount you pay) are based on a number of factors.

      -        Your Age: teenage drivers are the most dangerous because they are inexperienced and drive fast
(everyone else but you).
      -        Your area of the country: car repairs costs vary in different cities or parts of the country and your
insurance rate can be impacted by the local costs to complete repairs.
      -        Your car: a sporty Mustang is more likely to be involved in an accident than a Honda Civic.
      -        Your Driving Record: your rates are impacted by negative marks on your driving record which
include: prior tickets, accidents or insurance claims.  As the ticket count goes up, so do the odds that you will
be involved in an accident.

While some factors you can't control, your choices allow you to control some of the factors and reduce your

Be aware that some insurance companies will provide discounts on the insurance if certain conditions are met.  
Discuss these options with the company.  Many insurance companies offer discounts for students with good
grades or completing driver education courses / training classes.  Also, many companies offer discounts when
there are multiple drivers in the same family that have a policy with the company.   

Understand that the cost of a car is exactly that.  A car does not go up in value and should be viewed in those
terms.  Consider the overall cost of a car when making the purchase decision.  While a conservative car may
not be as flashy, in the long run the cost may be lower, allowing you to use the difference in cost (and cash
outflow) for other choices.