According to the Bureau of Labor Statistics, American households spend approximately $500 a month on their automotive transportation. Over a 60-year period of time, that equates to roughly $360,000. And, let’s face it, buying a car can be overwhelming. In this podcast, our guest expert, John M. Vincent, an automotive consumer advice writer with U.S. News & World Report, shares his knowledge to help simplify the car buying process, deciding whether you should buy new, used or lease a car, financing, how to negotiate the best price, how to research a car and where to buy a car.

Transcript

Brian Leitner: Welcome to Your Life, Simplified. My name is Brian Leitner, and I’ll be the host of this podcast. In today’s episode, we’re going to talk about the car buying process and a whole lot more. We’re going to discuss the conversation of buying a new car versus a used car, leasing versus financing that car, negotiating the best price, where to buy cars and other things to be thinking about, and why? Well, because according to the Bureau of Labor Statistics, American households spend approximately $500 a month on their automotive transportation, and over a 60-year period of time, that equates to roughly $360,000. So for many of us, it can be a very large expense within the context of our overall financial plan. On today’s show, our guest expert is John Vincent, and he is an automotive consumer advice writer with U.S. News and World Report. John, thanks for being here today. What is your role at U.S. News and World Report?

John Vincent: My role at U.S. News and World Report is twofold. I teach people about the car buying process—how to buy or lease—and then we also talk about what cars to buy.

Brian: So, you have a role that I have to believe most of us are pretty envious of. How’d you get into that line of work?

John: I’ve been doing this for quite a while. I started in newspapers and move to U.S. News and World Report a couple of years ago. I get to drive new cars all the time, and that part of my job is wonderful.

Brian: When you test drive cars, is it on a track or is it a sort of a real- world setting on the side roads, the highways and those sorts of things?

John: It is real-world for the most part. Some performance cars I take on the track, but mostly I want to use a car, like a buyer is going to use that car.

Brian: That’s great. Thanks for sharing that. As we talk about the car buying process and anyone who’s gone through this process knows that it can be overwhelming. And so, if I’ve made the decision at this point, that I want to buy a car, and I have a budget in mind, where do I start with research based on all I have available to me in 2018?

John: Well, the first thing you need to think about is what you need to get out of a car. You don’t want to do what a lot of buyers do and see a car that they love and try and figure out how to fit it into their lifestyle. You want to look at what you’re actually going to do and then go back and figure out what vehicles meet those needs. Fortunately, there’s a ton of resources out there now that we’ve never had before. There’s so much information available online. If you go to a site like U.S. News and World Report, you can see how cars rank against their peers, how they do in safety, reliability, performance, a multitude of attributes. There’s just tons of information out there, and it’s easy to get to.

Brian: You’ve mentioned a couple of those attributes, safety, reliability, performance and cost. Is there another one that we’re not necessarily paying attention to? And I think those are probably the pillars, if you will. But is there something else as an expert that you look at to analyze that car?

John: Absolutely. Technology, the modern cars are rolling computers. It’s a rolling entertainment system. There’s a lot of information coming into that car, and it needs to be presented in a way that you can access it while you’re driving that’s not distracting and that is a good user experience. Some manufacturers do great at that. Others don’t do so great about that. So we look at that very closely.

Brian: Yeah, that’s a great point. The technology’s changing on a regular basis. You could have purchased a car just a couple of years ago, and it used to be that the newer car would have enhanced safety features and so forth. And today with the way technology is moving, the amount that you can have access to within your car, some would say it’s good, and some would say it’s bad, but overall, I think we all believe it’s great from a safety aspect as well as technology, which is a great segue into the conversation of new versus used. What are you seeing in the marketplace today in terms of the used car market?

John: Well, used cars are a great opportunity. Cars depreciate the most in their first couple of years of ownership. So, if you would have somebody else take that huge depreciation and then come in and buy that same car for $20,000 or $30,000 less than they paid for it originally, that’s a wonderful thing. Unfortunately, on the flip side, you’re also giving up that opportunity to get the latest technology.

Brian: So you may get a better price, but you don’t have some of the other benefits of the technology, the safety, and I believe that there’s a difference in the financing between new and used as well. Is that correct?

John: Generally you’re going to pay a little bit higher interest rate on a used car and perhaps a shorter term. Also, you’re not going to have the opportunity to get the car deals that automakers offer—the cash rebates and zero percent financing and those kinds of things. Generally, when you buy a used car, you’re not going to have the big tax hit that you take when you buy a new car.

Brian: I guess the other con is, when you’re buying a used car you may have higher maintenance costs because, again, it’s not brand- new. It may or may not be covered under warranty. Those are some things you need to think through as well. When you’re looking at a car, mileage plays a role, because you don’t want to buy a car that has too much mileage. Where do you draw that line? Where is a sweet spot in terms of buying a used car and understanding how much mileage that car has?

John: Well that varies by car, but you want to look at when the warranty expires, and anywhere after the warranty expires, you are exposed to major repair costs. That said, you can also look at user forums online and see where other users of that car are starting to have problems. If you read that this car starts dropping its transmission at 60,000 miles, you probably don’t want to buy a car with 65,000 miles on it that hasn’t had a transmission replaced.

Brian: Especially if it is out of warranty to your point. That’s a great point. So, it’s really car specific. As it relates to being car specific or model specific. Years ago, the industry talked about Japanese cars and how they held their values better than others. Today, are there brands that are more reliable than others based on the research you do for used cars?

John: Yes, there are. And of course, you have Lexus, Toyota and Porsche on top of the list. They are always going to be there, but you also have some more affordable brands. Kia is in the top 10. Buick is in the top 10. You have to look at the numbers and not just assume that certain cars are going to have great reliability, because they’re not all going to be great, and they’re not all going to be bad.

Brian: That’s interesting. The two that surprise me there are Porsche and Buick. Just thinking as Porsche, obviously an incredible sports car, incredible piece of machinery, but performance maybe over reliability, so that would surprise me.

John: The difference on that is they are reliable, but when they break it’s very expensive.

Brian: And Buick too, the Oldsmobile, that’s come a long way in your opinion.

John: It has. All manufacturers have come a long way.

Brian: You mentioned the warranty and, as it relates to certified used cars, can you talk a little bit about what that certification process is and if that’s worthwhile?

John: A certified used car is a great opportunity to get a great deal that blends a lot of the attributes of a new car and a used car. With the popularity of leasing, there are tons of very well-kept two- and three-year-old cars coming back onto the used car market. These cars get certified by manufacturers and can be sold at their franchise dealers as a certified used car with warranties, some maintenance programs, roadside assistance and a number of other great features that you won’t find outside of certified used cars in the used car market.

Brian: So do they generally extend the warranty of the new car that was originally in place on the certified used cars for a period of time?

John: Yes, they do. All the programs are slightly different on how they do it. Some are based on when you buy it. Some are based on the original date that that car was in service, but they all offer some warranty extension.

Brian: So if you’re a fan of certified used when shopping for a used car, you have the commercials out there like Carfax, as it relates to the vehicle history reports. Do you believe those are worthwhile to walk through?

John: Absolutely. Any used car you look at, you want to get a comprehensive vehicle history report, such as a Carfax report. It will tell you things about how many owners the cars had, whether it’s been in an accident, it’s title history, whether it’s ever been totaled and brought back as salvage. You need to know those things. That said, those vehicle history reports don’t show everything. So, having a thorough inspection by an independent mechanic is a critical part of the used car buying process

Brian: So, bringing that use car to an independent third party is a terrific idea. I don’t know that everybody’s aware that you can do that. How does that process work? Do you need to put a deposit down before you take that car to a third party?

John: It depends. Reputable dealers will understand that process and allow that to happen. If you have somebody who is saying, “No, you can’t take this to an independent third-party mechanic,” that should be a big red flag, and you should probably run away from that deal.

Brian: Okay, that’s really interesting. As we transition to the flip side, new cars. What are some of the benefits of buying new?

John: Well, there’s the new car smell, which is a huge factor for a lot of buyers. So, when you buy a new car, you’re getting the latest safety technology, the latest infotainment and connectivity technology and probably great fuel efficiency. You’re getting a great warranty, and you know that nobody else has driven that car. It hasn’t been wrecked. You know what you’re getting.

Brian: As it relates to the warranty, when you go into the dealership, it’s a different conversation or it’s a different definition than on TV for a bumper-to-bumper warranty. Can you talk a little bit about that?

John: You’ll generally get two types of warranties on a car. You’ll get the bumper-to-bumper, or comprehensive warranty, that covers everything—all the electronics, paint and interior items. That’s usually good for three years. There are also powertrain warranties that are included in some cars that extend that coverage on the engine transmission. Things like that that are directly involved in driving the wheels. Companies like Hyundai and Kia have a 10-year, 100,000-mile powertrain warranty on their cars. That’s a wonderful thing to get if you’re planning on keeping your car for a long time.

Brian: So obviously the flip side, as you mentioned, buying new, it’s just an expensive proposition. The car depreciates the minute you take it off the lot.

John: The value of the car drops off a cliff. The moment you drive it off the dealer lot, you lose a substantial amount of its value in the first year, slightly less than its second year. And then it starts to shallow out as to how fast it depreciates.

Brian: The other potential con when buying used cars that I don’t think most people think about, but what if they are in a car accident? So you mentioned earlier, looking at that vehicle history report, trying to understand if it has been in a wreck. So if you’re shopping for a used car, you may not want to buy the car that’s been in that accident. Well on the other side of that equation, if you buy new and you wreck it, and the idea is that you were going to own that car for several years, you potentially have a problem when it comes to the secondary market in terms of selling that car later down the road. Correct?

John: Yes, you do. Although some car insurance policies allow you to get what’s called diminished value back. So, if you do wreck that car, and its value is lower, you can get some money back from your insurance company to take care of that gap.

Brian: So we’ve talked about buying new and buying old. Let’s discuss buying versus leasing and what makes the most sense. So can you talk a little bit about the pros and cons of leasing a car?

John: Leasing used to be just for companies and luxury cars, but now it’s covering the entire market, and about three in 10 cars that leave dealer lots are leased rather than purchased. With leasing, you pay for the depreciation that occurs during the time that you’re going to have the car. Nothing more, nothing less. There are a lot of pros to leasing because you’re getting a brand new car with the latest technology, the latest safety, the latest infotainment, and you’re paying a monthly payment that’s far lower than if you purchased the car. Another pro of leasing is sales tax. In many jurisdictions, you’re only paying sales tax on the amount of your lease payments and the amounts you pay down. You’re not paying sales tax on the entire value of the vehicle like you would have you purchased the vehicle.

Brian: So those are the advantages. What are some of the disadvantages of leasing over buying?

John: A huge con with leasing is that you have no ownership interest in the car. So when that lease is up, you walk away with no money in your pocket. When you go to the dealer with a purchased car, you generally get some money back in a trade that you can use as a down payment on your next car. With leasing, you don’t have that.

Brian: I think a lot of people love the idea of leasing because they get that brand new car every couple of years, right? It’s not something that they need to be married to for eight, 10, 15 years, but my next-door neighbor just happens to be going through this process. They leased this car about three years ago, and he’s up on the mileage, and now it’s costing him a fortune every single day to commute to work. So that really is something you need to take into account. Try to ballpark the mileage you put on a car every single year to truly understand whether you’re going to fit with inside of those mileage requirements. Otherwise it can be incredibly costly.

John: That’s absolutely true. And the other thing about leasing is, while it is simple in concept, in practice it is extremely complicated. It has its own vocabulary that’s completely different than the rest of the car buying world. And you can fall into a lot of traps in leasing and cost yourself a lot of money if you do it wrong.

Brian: And again, as you mentioned, after that lease, you do not have transportation. So even if you purchase the car, you may not like it after three years, four years or so forth. You have a mode of transportation as opposed to having absolutely nothing and then having to make this decision to either go through the car buying process or car leasing process. So, after those three or four years, you’re forced into making yet another decision on what you’re going to do for transportation, and you won’t have a down payment in your pocket to help you make that decision. So John, I was just recently having a conversation with someone who was in the process of leasing a car. And to your point, they’re using terminology that a lot of folks might not understand. And so when you’re leasing a car, they talk a little bit about what that money factor is. Can you explain that? In very simplistic terms.

John: The money factor in leasing is simply the interest rate that they are charging you on the money that is financing that lease. They express it in a different term. That can be very confusing, but you can see what that interest rate is by going to a calculator online and converting the money factor to an interest rate and then you can kind of compare that to what banks are charging on new car purchases.

Brian: Great, so it’s an apples-to-apples comparison. Exactly. So John, if we were to take a step back, and I know that there are a lot of different factors, but all things being equal, if we took a nine- year period of time and said that an individual was going to lease maybe three cars for three years within that period of time, again, all comparable features and so forth, in which scenario the buy or the lease would be more cost effective?

John: If it were my money, I would be buying a car. I have a lot more freedom. I’m not locked into the cycle of leasing, and I can sell my car anytime I want to and get into a new car. I can’t do that with the lease. So just that added flexibility makes all the sense in the world. Absolutely.

Brian: Hey, just a quick note to our listeners. If you have a topic that you want to hear on this podcast, or you have a question about your own personal financial situation, please don’t hesitate. Go ahead and send us an email at [email protected], and we’ll have an advisor reach out to you directly, and now back to the episode. So now I’ve made that decision to buy, whether it be new or used. Let’s talk a little bit about the financing. What are you seeing today in that space?

John: There’s a lot going on in financing right now. First of all, we have slowly rising interest rates, very slowly rising interest rates, which make today a good time to buy a car because next year it’s going to be more expensive. But we’re also seeing some kind of troubling trends in financing, and they include long-term financing contracts where you’ll be paying for your car for seven, eight, even nine years. And that is a ridiculous way to buy a car.

Brian: It is like other types of large purchases. The car buying process, the home buying process, it becomes a very emotional and once you see the car of your dreams, and you want to have that and maybe you have a monthly payment that you think you could make, you may not have the budget for that luxury car, but you fall in love with it. You just start backing into the math and extend that out. That can be a terrible financial decision for folks.

John: Buying a car based solely on the monthly payment is a horrible way to buy a car. Instead, you want to be looking at the complete cost of the car, including the financing throughout the length of the loan. So, the financing picture needs to be backed up much earlier in process. You need to be thinking about financing before you even decide what kind of car to buy. You should get a pre-approved offer from a lender, so you have that budget locked in before you even think about going to a car dealership.

Brian: Historically, people would look at the car dealer for lending. They might look at their credit union. They might look at maybe the equity in their home, several different places. Where do they get the best deal and financing?

John: Generally speaking, they get the best deal and financing by looking at a lot of different lenders and figuring out what the best deal is. And you can’t put that off until you’re in the dealer financing office at the end of the transaction. You need to start that early and talk to your bank or credit union. Credit unions offer great rates that you won’t generally find at dealers or banks because they’re member owned, and the profits of the organization go back to lowering rates. Banks have a lot of special deals where they’re trying to get market share. So they’ll offer some really good rates as well. When you go to the car dealership to get financing, if you don’t have a pre-approved offer that they have to compete with, they can mark up the financing that they’re going to get as much as they can get you to take and censure their time pressure. You don’t think you have an opportunity, you probably are not going to get the best deal from that in that scenario.

Brian: That’s a great point. Be prepared and know exactly what you have access to and what your options are probably puts you in a much better situation than to then try to understand that on the other end of the table while you’re in that office at the dealership. I mentioned just a second ago, a home equity line of credit taken from your house before the new tax law would have been a deductible expense. But today, it is no longer tax deductible when you’re taking out equity out of your house to pay for a car, and so it really levels the playing ground, if you will. Now it’s an apples-to-apples comparison, as opposed to the way it used to be. You’d have to compare the true, after-tax interest rate. You’d have to pay on that. So, I think that aspect almost simplifies the process, although it may have reduced some of the options for folks.

John: The other great thing about having a deal in place before you head to the dealership is that it gives you a lot of confidence. Most people put a lot of emotion into buying a car, but it’s a business transaction. You’re trying to get the lowest price. The dealership or the private party or whomever you’re buying the car from, is trying to get the most profit out of the car, then that’s fine as long as it’s done ethically and legally. Being prepared, you can go into that process with a whole lot more confidence. And remember that you buy a car every five or six years, the dealer is selling a car every day, and they’re very good at what they do. So anything you can do to build your confidence and build your knowledge is very powerful in the process.

Brian: Like anything else, stacking the deck in your favor and being knowledgeable before any large purchases just makes all the sense in the world. So, as it relates to negotiating the price, obviously, in our society there are a lot of jokes on this. Anytime you’re asking about the price, that salesperson at the dealership needs to talk to his or her manager. What are your thoughts on negotiating the best price? How do you do that? You’ve been armed with some information because you’ve done your research, now what?

John: Know how much you can pay and know what your budget is and be strong about staying to that budget. The other thing is, car dealers are very good at bundling all the components of the transaction together. That’s the purchase price of the car. That’s the value of your trade. And that’s the cost of the financing. When they do that, it’s very easy to play a kind of a shell game and make it look like you’re getting a great deal here. But taking something away in one of the other boxes, so they might show you a price on the car that’s $2,000 lower than you were expecting, but then you look at your trade-in value and notice that it’s $2,000 lower too, because they involve so many numbers. It can get very confusing, and confusion is a bad thing for buyers.

Brian: That’s a great point. Like most things, transparency is key, and you bring up an excellent point as it relates to the trade in. So, if I was in the market for buying this car, I have a car today, it’s about five years old. I’d like to trade it in, because we have no use for it. When do I bring up the fact that I have a trade in? When does that come up in the process to determine how much money they’ll pay to take that off my hands?

John: Well, before I even get to the car dealership, I would explore what the value of that car is worth and maybe explore other options for selling it, whether it’s selling it to another private party or trading it in at the dealership. My last car, I sold it to Carmax. I sold our old minivan to Carmax and took that entire chunk of the transaction out of the new car dealers’ hands. So that wasn’t even a part of the negotiation. I unbundled it from that big complex transaction.

Brian: That’s a great point. So even before having that conversation try to understand, not only the value, but what the secondary market is, if you were to do it on your own and then comparing that to the bundle, right? So, John, now that we’ve talked about the negotiation process, and I’ve referenced the dealer a little bit, you mentioned Carmax. There are different ways to buy cars today than there were years ago, whether it be a car dealer, the internet, a car broker. What are your thoughts on where to buy a car today? Where do you think you’re going to get the best deal, the best value and candidly, the best product?

John: It all depends on the car. For some vehicles, you’re going to find great incentive programs. If you go through the dealers, others you might want to look at car buying programs like, U.S. News and World Report’s Best Price Program where they have guaranteed savings at dealers.

Brian: The Best Price Program through U.S. News and World Report, can you talk a little bit about what that process is?

John: We work with partners at TrueCar that work directly with local dealers and provide guaranteed savings to consumers when they buy cars or actually lease cars. On average, somebody who goes through the Best Price Program, saves more than $3,000 off sticker price. There are also some new ways to buy cars. Volvo just introduced a subscription program where you pay a monthly fee, and it takes care of everything on your car, maintenance, purchase, and you can go in and get a different Volvo six months down the road and pay a slightly different subscription fee. Then a few months later go and get a different Volvo, and you’re just paying a monthly subscription just like your phone bill.

Brian: That’s a really interesting program. It sounds like, as a society, we continue to go to this subscription-based model, and people seem to enjoy that. So, based on the changes in the car buying process, whether it be the process that you folks leverage, whether it be the dealership with the advent of the internet, I just saw a commercial the other day where you can buy a car through a vending machine. So where do you think we’re going to be several years from today?

John: It’s going to look a lot different. We have some very strict dealer franchise laws in this country that protect the old buying model very well. But there are a lot of market forces against that with a lot of pressure to go to a direct manufacturer to buyer transaction or various forms of a hybrid lease subscription, so different ways of buying cars and different places to buy cars. In five years, things are going to be a lot different with cars. As expensive as they are, getting the old model of going in and trading in your old car and being able to afford a new car with a reasonable length of loan, is getting more and more difficult. So another thing we’re likely to see in the next few years is more of a move to a fixed priced model, where instead of the freewheeling negotiation we’ve had forever in the car buying market, there will be a fixed price on that car and no negotiation. It’ll be simple. There’ll be less confrontation. It’ll be better for everybody.

Brian: You know, we’re talking about what the future looks like maybe a few years out. And what’s interesting is, even today, you do not have to get off your couch to even buy a car. And I think that is just going to continue to grow in terms of demand. At the end of the day, I know the exact car I want to buy. I’ve done all the research. I don’t want to haggle. I don’t want to talk to anybody. I just want the car to ultimately show up in my driveway. I think that’s probably where we’re headed.

John: We’re 90 percent of the way there now, but once we get a few more of the financing pieces in place where you don’t have to go and sign papers, we’ll be there, and they can drop the car off at your house, pick up your old car, and you’re done.

Brian: So John, as a relates to financing, most people are financing the purchase of their car, whether it’s a new car, used car or even leasing a car. What should people know about their credit or their credit score before going through this process?

John: You want to know your credit score, and then you want to look into the report and see what’s behind that credit score. That can have a huge impact in how much you pay for the car and how much it costs to insure the car, because insurance companies look at your credit when they decide how much your car insurance is going to cost. So, knowing about that before you go into the process, using that information as leverage with the dealers to say, “No, my credit’s great. I should be getting this deal” is very powerful.

Brian: So John, as we wrap up, we ask every guest at the worst financial decision they’ve ever made. So, John Vincent, what is the worst financial decision you’ve ever made?

John: It has nothing to do with car buying. When I bought my house, I didn’t look at the property tax picture for the city that I moved into, and had I been 300 feet away, I would save $2,000 a year in property taxes.

Brian: That’s terrible. I’m sorry to hear it. If you are still in love with your house, that’s what’s important. John, thanks again for coming on the show. We really appreciate your expertise and taking the time, thank you. Special thanks to our listeners. We hope you’ll be more informed and feel more confident when you need to make a decision on what your next automotive solution might be for you and your family. If you have questions about the content of this show or any other questions or things that you’d like to hear, please feel free to email us at [email protected], and, as always, if you liked what you heard, please go ahead and leave us a comment and remember to subscribe to this podcast so you don’t miss an episode. We know that your time is incredibly valuable, and we hope you find this podcast a worthwhile investment of your time.

Brian: Thank you for listening.

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy.

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, legal or tax considerations. As such, the information contained herein is not intended to be personal legal, investment or tax advice. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. The opinions are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon.

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