This is how much cash in hand you have to purchase your vehicle.
Not how much you can afford each month. You should never go into debt to buy a depreciating asset. Car payments are the major reason the middle class has no savings.
0% interest is not free lending. If you pay with cash on a new car, they would give you a discount of thousands of dollars. This is the real price. The 0% interest is a marketing ploy.
You shouldn’t spend more than 5% of your net worth on your vehicles (depreciating assets). This means to buy a $5000 car, the value everything you own, minus all your debts should be $100,000. Brand new $30,000 car? Your net worth should be $600,000.
My personal rule is lower, I aim for 3%. I know this is unfathomable for most people, but most people have no idea how much compounded interest of debt steals from your future prosperity.
2. Determine what you are looking for in a vehicle
Are you commuting a long distance?
Is fuel economy most important to you?
How many passengers will you be driving usually?
What is the most passengers you will need to be able to take on occasion?
Is safety your biggest concern?
Do you need to park often on the street in small spaces?
How much cargo capacity do you need?
Use this information to determine what type of vehicle would work best for you, a compact car, mid-size sedan, hatchback, mini-van, SUV, etc.
3. Determine 1-3 exact make/models, year and odometer range that are best for you
If your budget allows for a new car, you can google “best SUV* of 2017” (*whichever type of vehicle you’re looking for)
Then you can google “Volvo XC90* vs.” (*whichever make/model is determined from your previous search)
Then you can go to different dealerships and test-drive and compare.
However, since most people do not have a million dollar net-worth, and cannot afford to trade compounded years of retirement for a new car, I will devote the rest of this post to discussing how to buy used vehicles.
Go onto Craigslist and search used cars put your maximum budget +/- 20% in the minimum and maximum field eg. $5000 max budget, put $4000 minimum to $6000 maximum.
Look to see what vehicles of your chosen type are available in that price range.
Why put a maximum higher than your budget? Because we are going to look for a deal. You want to see what a fair priced car is at your budget + 20% and then wait until you see this ideal car priced low at your budget. Then you know you have a deal. This could take months depending on how good a deal you determined to get.
Research the different vehicles, google “Toyota Sienna* 2007 reliability”
Do this for each of the three make/model selections you have made.
You may find different variances/options of the same vehicle with the same make, model and year with very different reliability history. One type of engine or transmission may be known to have issues while the other variant has no issues at all. You can use this info to screen out the vehicles to avoid.
In the past, I have tried to find a vehicle with just over 100,000 km and then sell it before it gets to 125,000 km. (I kept it 3 years and drove very little.)
I have also found a car at a good price with under 70,000 km and then resold it with less then 100,000 km.
Psychologically, crossing 100,000 km on the odometer changes the value of the car in people’s minds. Same with 200,000 km.
With my most recent vehicle, a 2005 Volvo XC90, I purchased it with 225,000 km. The reason I chose this is because the vehicle had completed the entire maintenance schedule and all major expensive repairs and replacements had been done. The engine should easily last to more than 300,000 km based on reviews and speaking with a mechanic, and only minor maintenance will need to be done while I own this vehicle.
4. Wait for a deal
Once you know what make/model year combinations you are looking for keep checking Craigslist for a deal.
Car dealers will generally not give you a deal. Selling cars is a zero sum game, your loss is their gain. Dealing with private sellers will generally always give you a better deal than a middleman.
When you find a car you are interested in, call the seller and ask the following questions:
Confirm the make, model and year.
Confirm which engine, and option package it is. Remember to avoid the bad engines you found in your research.
Confirm the mileage (odometer).
Why are you selling the vehicle? (Do they sound suspicious? Does it sound legitimate?)
If they say they are selling it for a friend or family member you should be cautious. Generally, you should only be dealing with the legal owner of the vehicle.
Is it a rebuilt car? Generally, I would always avoid rebuilt vehicles, especially if you are transporting a family. Safety is always compromised.
Has the car been in an accident? This isn’t an automatic veto. If it was a minor fender bender, a couple thousand dollars damage or less, then you could still consider it. Anything more than that and I would pass.
5. Check out the vehicle
If the seller passes all your questions, ask when you can go view the vehicle.
Go with a friend (preferably someone who knows a little about cars).
Don’t bring the cash with you on the initial visit for your safety.
Ask to see all documentation for the vehicle, ask to check the seller’s id is the same as the documentation.
Ask for all repair receipts. If they have no evidence, assume no work has been done. If work was done at a dealership you could call and ask for confirmation of work done if they don’t have the receipt.
Things you want to look for:
Signs of accident repairs they haven’t mentioned, such as ‘spray over’, spray paint under the body of the car where it shouldn’t be. Body panels that don’t line up.
Little scratches and dings are your call, if it was previously undisclosed, and is excessive, you could ask for a discount, you tell them you want X hundred dollars taken off the price.
What is the general condition of the car? You are trying to determine if it was well taken care of. Is it dirty and messy inside? Probably a bad sign.
Check the interior for damage.
Test all the lights, power windows, mirrors, radio, all buttons, with your friend.
Check the oil dipstick, is the oil dirty and black, or is a golden color? I once checked out a car that had no oil in it! I didn’t buy that one.
Check the tires for unusual wear or bulges indicating a problem with the steering or alignment.
If it looks great, try to hide any excitement and really focus on finding flaws, you want to be able to negotiate the price lower later.
Turn on the engine, listen for any strange noises.
Test drive the vehicle, take it on both city streets and highway.
See how it accelerates.
Listen for weird noises, you may find some rattling, determine it is something inside the vehicle.
Pay attention for anything strange when you make turns. Make both left and right turns.
Tell the owner you want to test the brakes. With no cars behind you on an empty stretch of road bring the car up to speed and then hit the brakes hard. (Warn the passengers first!) See how the car responds.
6. Get a pre-purchase inspection!
If everything still seems good, ask the seller if you can take the car to a mechanic of your choosing for an inspection.
This could cost $150, don’t skip this step! If you don’t do anything else, you must do this. Even if you are buying a used car from a dealership, get an independent inspection!
I would recommend taking the car to the same make dealership if possible. eg. Take a Volvo to a Volvo dealership. Any repairs they quote will be a higher price than other mechanics usually, and you can use this to negotiate down the price later. If it is the same dealership that has been servicing the vehicle, they can tell you its service history too. Ask for a printout for your records.
Call a mechanic and ask to schedule a pre-purchase inspection at a time that works for you and the seller. Make sure the mechanic knows you are paying for the inspection. And you should be the one to pick up the vehicle when the inspection is finished, it is your report.
The report will tell you exactly what is wrong with the vehicle and you can ask what the approximate cost is to repair each item.
You can then take this to the seller to negotiate the price lower by the cost of the repairs. Unless the necessary repairs were previously disclosed by the seller, you should be asking for the full cost to be deducted from the price.
Only exceptions you should make are for routine maintenance items and consumable items, such as transmission flush, oil change, tires or an empty tank of gas. You can certainly try to negotiate on these, but they shouldn’t be deal breakers for you.
7. Get the repairs done first
Take the money you negotiated down the price of the vehicle and get the needed repairs done first. Safety first, enough said.
8. Enjoy your car and watching your bank balance grow
You now know exactly what you got, you know it’s not a lemon, and you know you got a great deal.
And instead of paying a car payment each month, in a couple of years if not months you will have thousands of dollars back in your bank account. And you can sell this car and get an even better one with 5% of your growing net worth.