What's the best way to buy a car?

There are so many car commercials tempting you to buy a car and affordable options to buy it but let's dig in and get a better understanding of what that means for you.

People sometimes say they are "investing" in a car - meaning they probably paid too much for it and they are stretching their budget. Cars are not investments, period. Investments increase in value and earn you money. Cars do the opposite, they depreciate over time so what you pay today for a car, its value and worth goes down each day you own it and when you sell it - it will sell at a much lower price then what you paid for it.

What are the options to buy a car?

Leasing; this is the most expensive way for you to finance a car. Dealerships love it because they make the most money when someone leases a car.

Basically, you agree to put a sizable down payment (usually about $3000 - $5000) and for a short term you pay them a lower payment per month.

If at the end of the lease you decide to lease another vehicle from the dealership or buy the car you are leasing the dealership will usually work with you because they are making money. BUT if you decide to turn in the leased car and walk away thats where the issues come. They will get you for new tires and other things that may happen to the car during the time that you had it. At the time of lease they will try to get you into all kinds of warranties too, so be careful.

Car Loan; you can take out a car loan. If you go through the dealership, this is the second biggest way they make money.

So think about it; you are buying something that is going down in value, losing you money everyday plus paying interest on the money you borrowed.

Lets look at the numbers:

Purchase price $50,000 - Term 60 months (5 years) - Interest Rate 8%

So including tax, registration, fees, etc the monthly payment is around $1,013.82 (using NY state tax and numbers)

This means you pay about $10,829.18 in interest alone over the life of the loan.

The entire amount you pay for that $50,000 car is $67,254.18 BUT 5 years later after the car is paid off its only worth maybe in the $20,000 - low $30,000 range.

And don't forget all the costs - insurance, maintenance, registrations, inspections, tires, gas, parking, tolls - that come with owning a car.

Another option is to go to your bank and get pre-approved for a car loan and take that pre-approval to the dealership.

Cash; dealerships hate this because they make the least money when a customer pays cash. There will be an argument for this because people won't want to take the money out of their bank account and say they will lose interest. So let's look at the numbers:

First, if you are taking the money out of your account to pay for a car you probably won't buy a $50,000 car. Say you are now looking at the previously owned 1-2 year old car for about $28,000.

You intentionally saved up the money for the car and now you are withdrawing that money out of your savings account.

So let's plug the numbers in to the car loan model.

$28,000 plus tax, title, registration, and other fees you pay $32,830 in cash that day.

Say you had that money in a high yield savings account which are currently earning about 3.5%, the interest is about $1,149.05 per year times 5 years $5,745.25 would be about what you "lose" in interest taking that money out of the account over 5 years BUT you are going to intentionally save money for your next car and probably putting into the saving account at least $500 a month shrinking that $5700 potential loss and not overpaying for a car and not paying interest to anyone.

Key points;

• Remember a car is a utility, not an investment.

• Save, save, save, try to buy a car for cash but if you can't try to put down as much as possible before taking out a loan.

• Go to your bank for pre-approval, that could help from getting you talked into something you can't afford.

• Buy within your means, don't go into debt to impress others.

• Always look online at the reviews, check the current value of that car (Kelley Blue Book is a good source)

• Always check with your insurance provider to see what its going to cost you to own that car. (Ask if there is a discount to pay once a year for the insurance and not go on a monthly payment plan {sometimes you can get a 5-10% discount for paying yearly}).