Car shopping can be very stressful. A wrong decision can have far reaching negative consequences that affect people’s lives. Therefore, car shoppers should consider all options before signing a contract. The following provides an explanation of some of the most important steps that a car shopper should consider.
Step 1 – Make A Decision on Car Type
A decision on car type is an obvious starting point which should be directed by your ‘needs’ as a car shopper as opposed to your ‘wants’. If you let ‘wants’ direct the needs, this can lead to an expensive mistake. If you are a car shopper and you want to understand your needs, these mostly evolve around:
1. Engine – the most dominant factors in this is are the fuel type (diesel engines are cash for junk cars more efficient than petrol) and the size of the engine (which determines the power for speed and acceleration);
2. Transmission – there is one of three options, manual, automatic or semi automatic with automatic being an option for those that like to avoid changing gears because they spend a lot of time behind the wheel. Automatic vehicles are most often less fuel efficient than manual vehicles;
3. Size of the vehicle – what will be the average number of passengers seated in the vehicle for most journeys and is there a requirement for additional space?
4. Likely Usage – how frequently and how far will the car be driven each week? If it is a company car then the chances are that it will generate a lot of miles on longer journeys quickly. However, if it is a family car that is required for school runs and grocery shopping then there will likely be a large number of short journeys. For cars on long journeys the engine size and transmission type become important to optimise efficiency.
Step 2 – What Is Your Monthly Budget?
If you are not buying a car with cash and are looking to use car finance (hire purchase, car leasing or car loan), once you have made a decision that narrows down the car type, the next critical decision is to decide on your budget for monthly car payments. A general rule is that your total monthly payment shouldn’t exceed 20% of your net salary (ie; your take home pay) per month.
Step 3 – How Should You Finance Your New Car?
The four most common ways to finance a new car are by paying cash, by using hire purchase, taking out a loan with a finance company or by leasing the car. These four different finance options can be categorised in to two main groups of car finance:
1. Those with which you ultimately take ownership of the car (paying with cash, car loan or hire purchase – with hire purchase you don’t own the car until your final payment); and,
2. Those with which you don’t own the car unless you opt to buy it at the end of the finance period – car leasing. There are primarily two types of car leasing: (a) An operational lease (also known as contract hire), you don’t actually own the car you just pay a monthly fee to keep it for a period typically between two to five years; and, (b) Lease/Buy (also known as contract purchase), you pay a monthly fee to keep the car but you have the option to buy the car at the end of your contract (for a price agreed at the time of signing the original contract).
Therefore, the decision that must be made is whether or not you want to own the car. To do this you need to consider the benefits of car leasing vs car buying. There is an enormous amount written on this and great debate as to which is better. However, there is no correct answer and depends on the circumstances of the car shopper. Nevertheless, the benefits of each are:
Benefits of Car Leasing vs Car Buying:
1. Businesses avoid at least 50% of the cost of VAT (if they use contract hire);
2. No large upfront deposit;
3. You obtain a more prestigious vehicle for less money (sometimes as much as 60% less);
4. You update your car every 2 – 4 years;
5. You avoid the stress of buying and selling as the new vehicle is delivered and the old one is picked up by the leasing company.
Benefits of Car Buying:
1. There are no contractual restrictions such as penalties for excess mileage or wanting to change a car earlier than expected;
2. If interest rates are low and the vehicle is one that depreciates quickly (some cars depreciate as much as 40% in the 1st 12 months) it might be best to buy the car.
Step 4: What are the costs of ownership of your preferred car?
It is wise to consider the costs of owning a vehicle over the entire life of the vehicle. For example, there could be two cars that you are looking at and one is cheaper to buy than the other. However, the cheaper car might actually cost you much more over the entire period that you have it rather than the one that is more expensive upfront. Costs that you should consider are annual road tax, fuel and maintenance costs, insurance and depreciation (depreciation is not an issue with car leasing)
Step 5: How To Find The Best Car Prices
By now you should have a short list of at least your top 3 vehicle choices with your number 1 option being the most cost effective. However, you now want to understand how to find the best price for your preferred vehicle. The fastest way to determine the cheapest price for your new car (whether you are buying or leasing) is to use the internet. There are many different types of car websites that compare the cost of cars and the cost of car finance. You should spend some time looking at these and by doing so locating what is the cheapest and what is the average price.