In case the title didn't give the secret away, I BOUGHT A CAR!!! Can you tell I'm excited? I mentioned in a previous blog that a goal of mine would be to purchase my first car ever. I've now accomplished that goal. And, I as I have committed myself to sharing all my learnings with you, I've come to tell you about the experience.
I saw Smurffette across the sun-baked Boch Honda dealer parking lot and it was love at first sight. As I glided towards her, her car horn honked in response, and we knew. ... Okay okay - just kidding. It didn't happen like that. But wouldn't it be nice if it had?
In reality, I started saving in October of 2018 for my car. I wanted a Certified-pre-owned (inspected, refurbished, and still covered under the manufacturer's warranty) Hyundai Sonata that would meet my needs. And I wanted to buy the car outright. While I know that some people use credit to their advantage (points through credit cards etc.), I have committed myself to living as debt-free a life as possible. In that vein, I saved a little over $17k from October until July, when I purchased Smurffette.
In order to determine how much I would need to save to purchase my car outright, I looked into what cars similar to what I wanted were selling for. In MA, where I live, there is also the state tax that comes into effect, which essentially raises the car price to about $1,000 above whatever the ticket price mentions. Additionally, most car dealers will inspect, register, and provide license plates for the car you purchase (if you trade your car in, you don't need new plates). All of that is on top of what the ticket price says. With that in mind, and knowing that Certified-pre-owned cars would be a bit cheaper, I was aiming for about $17,000 - $20,000.
In addition to buying my car outright, I wanted to limit any additional monthly payments I'd need to make. By not financing, I wouldn't have a monthly car payment and I had already been factoring the cost of gas into my monthly budgets for when I used my parents' car. The only thing left to consider was insurance, so I factored that into how much I wanted to save up (by getting quotes from various places). Many insurance companies give you a discount if you pay the year amount in full, which was aligned with my plan of not having anything to pay monthly.
With all that in mind, I went about saving. Some months I put away more than others, but I got to a decent amount around June, so wanted to start test driving some cars. My dad and I went to several dealerships and test drove some cars, as well as asking for information around pricing. Here's the kicker: Contrary to what I had believed - the car dealerships did not offer any benefits (or discounts) for paying for a car outright. Car dealerships have more of an incentive to convince you to finance than they do to take all your hard-earned (and saved!) money up front. Despite this knowledge, I was undeterred.
I had looked up a couple of cars online and saw Smurffette for the first time. She was everything I needed, in my favorite color, and a good asking price even with taxes, inspection, registration and new plates factored in. We went to the dealership and I test drove her. She had 4 miles of gas in her tank. I told the car salesman if we ran out of gas before we got back to the dealership, he would be walking to get us some. By the time the test drive was over, there was 1 mile in the tank.
At his desk, we discussed price. Everything was going well until I revealed that I'd be paying outright that day. The salesman told me he'd been offering me the "financing cost"
and had to check with his manager for the cost associated with paying the car outright. It raised the cost (with tax included) to about $3,000 more. You can imagine my shock. We'd gone to other dealers who's prices also fluctuated based on whether or not you were financing or buying outright, but it hadn't been this drastic. It turns out, the salesman had been offering me a discount form their ticket price because he thought I was financing. Once he realized I was paying in cash, the discount went away. This says a lot about how hard our financial systems work to keep people in debt rather than reward them for staying out of it.
After much deliberation (and soul searching), I decided to finance. I reasoned that I had the money already in the bank, and it didn't matter if I paid it right then, or in a few months time. This was a hard decision to make for me because I really do believe in living debt-free, but looking at the math, I couldn't justify not financing. I could either pay off the car within three months, and pay an extra $72 total in interest over that three-month period, or I could pay outright up front and pay an extra ~$3,000. Financing it was.
With all the knowledge I have now about buying cars, I would still recommend paying for it outright if possible, and if not, saving for the cost of the car and then financing with a hardcore dedication to pay it off within the allowable amount of time. That being said, here are a few things to keep in mind:
Save up the cost of the car before you go in to buy it. That way, even if you finance, you know you can pay the car off quickly and not pay a lot in interest.
Know your credit score because that will affect your interest rate. My credit score was essentially zero because I don't have any loans, credit cards, etc. This made my interest rate 12% for the loan, which is very high. This was not a problem for me because I plan on paying it off in three months, but you should consider this in your calculations.
Know the minimum you have to finance (if you decide to finance). I had to finance a minimum of $10,000 in order to get the loan. Initially I wanted to put down $10,000 and finance $7,000, so I'd have less to pay off, but that wasn't possible.
Make sure your contract does not have a fee for paying it off early. This was something I asked about because I didn't want to have to pay monthly payments for an extended amount of time. My contract states that I have to make a least three payments - so I will be splitting the total amount I need to pay by three and paying everything off in November.
Call your bank ahead of time. I did not do this and it added an hour onto my time at the dealership. I needed to call them to let them know I was making a big purchase, and to increase my daily spending limit which I hadn't even considered I'd need to do.
All in all, I am extremely happy with Smurffette, and proud that I accomplished a goal I set for myself. I didn't do it in exactly the way I wanted, but I still was able to make informed decisions because I'm in control of my money and not the other way around. Every experience offers us an opportunity to learn, and I definitely learned something when purchasing my first car. Learning experiences also offer us the opportunity to pass that knowledge on; I hope this post did just that.