Budgeting for College: Buying Your First Car Andrea Morgan, Gary Moore, and Melissa Greenslade Program Coordinators University of Arkansas Office of Financial Aid Things to Consider… Finding the Right Car for You Closing the Deal Paying for It Loans/Credit Other Costs Lifestyle/Budget Leased/New/Used Title/registration; insurance, maintenance, etc. Anything else?!? Rules! Finding the Right Car for You Lifestyle considerations: Manual or automatic? Do you need four wheel drive? What safety features do you want? Will you be doing any towing? Will the car fit in your garage or parking space? How long do you want to keep the car? How many people do you need to transport? How much time do you spend in your car? What type/how much driving do you do most often? Finding the Right Car for You How much car can you afford? Know your budget A good rule of thumb is that your monthly car payment should not exceed 20% of your monthly take home pay Remember interest costs on car loans Remember to consider gas costs Consider the car’s gas mileage and what type of gas it requires Also budget for insurance, registration, scheduled maintenance, and car repairs Finding the Right Car for You Research, Research, Research Know what kind of car you want to buy and what features you want it to have Go to the dealership BEFORE you are ready to purchase to check out the cars in person Take a test drive Resources: Edmunds.com KBB.com (Kelly Blue Book) Consumerreports.org Carbuyingtips.com Buy or Lease? Lease: like renting a car, but for a longer time period You should consider a lease if you meet all four of the following criteria: At the end of the lease contract, you either have to turn the car in or buy at the price listed in the lease Leases are generally only for new vehicles Able to write off your lease payment as a business expense on your tax return Drive fewer than 15,000 miles per year Prefer to trade in your car every three or four years Want to avoid the hassle of selling your used car Leasing is not a good option if you are thinking about buying the car in the long run Advantages of Leasing You could get a new car every few years before the car needs significant maintenance and without having to sell a used car Potential for smaller down payment Lower monthly payment Disadvantages of Leasing You pay more if you go over the mileage allotment in the lease agreement You don’t own the car at the end of the lease There is a big financial decision at the end of the lease – you must either turn the car in or buy it If you intend to buy, leasing generally costs more than purchasing from the start New or Used? May boil down to what you can afford You could save up to 30-40% on a 3-year-old model You may owe more than it is worth if you decide to sell a new car you’ve had for only two to four years. Many manufacturers now offer certified used cars These cars have passed a detailed inspection and the manufacturer usually adds a warranty (can be 12 months or more) Buying a Used Car Can be bought from a dealer, private party, or online Research used car prices/values Edmunds.com KBB.com (Kelly Blue Book) Check out the vehicle history Autotrader.com; cars.com; Craigslist; and eBay motors Carfax.com or autocheck.com Ask for vehicle service records Thoroughly inspect the car Have it inspected by a mechanic if possible Warnings about Used Cars Salvaged Vehicles – vehicles that were involved in an accident or that incurred considerable damage Lemons – vehicles that have been repaired 4+ times for some defect within a warranty period but is not fixed Check on your state’s Lemon Laws for new cars to find out what to do if your new car is a lemon Flipping – buying a vehicle and quickly selling it. There may be a reason the seller is trying to get rid of it quickly Buying a New Car Research Find out the Invoice Price Check if there are any rebates or specials deals Manufacturer’s Suggested Retail Price (MSRP) or “Sticker Price” – the price posted on every new vehicle. KBB.com; Edmunds.com This is the dealer’s cost for the vehicle; it does not include any advertising, selling, displaying, or financing costs Required by law Usually the highest market price Good starting point for getting a fair price is to aim for a target price of 2% over the dealer invoice price Buying a New Car If you find a car you are interested in purchasing, you have a couple of options: Bargain remotely (by phone/internet) Call the Internet Sales Manager or Fleet Manager and tell them you know the invoice price and are looking for the best deal Once you get a price quote, you can contact another dealership to see if they can beat that price You can go back and forth on this until you reach a price you decide is fair Have a copy of the contract faxed to you to review before you agree to it. Look for any hidden add-ons or price increases Buying a New Car Go directly to the dealership Know the invoice price and any other special offers available Stick to discussing the invoice price Don’t let the salesperson change the subject to the MSRP or monthly payment amount Negotiate one area at a time – i.e. vehicle price, trade-in value Know what you can afford and stick to it Walk away if you feel uncomfortable or too pressured Closing the Deal Even if you already have financing approved, get the dealership’s best financing offer: it may be better than what you have in hand Extended warranties Other add-ons – pay attention to prices and whether these things are needed In most cases, you will probably want to pass on this If you do buy one, make sure you understand what it covers Rustproofing Security etching Remember you can still walk away at this point! Bargain Hunter Tips Buy out of season vehicles Convertible in winter Buy a model late in the year before a body style change Look for an overstocked or mass market vehicle with cash incentives Buy around the last day of the month (dealers have quotas) Buy at the end of the year (some dealers will clear out inventory for tax reasons) Escape the auto debt trap by keeping your car for at least 3 years after you’ve paid it off, then continue to pay your car payment into a savings account. You can use this money plus your trade-in to cut down on the costs of your next car Paying for Your First Car Consider how much you have or can save for a down payment Shop around for financing Recommended to have 10-20% down Check with local banks and credit unions – they are more likely to give you a better deal on a loan than through the car dealership Have financing before you go to purchase a car What to look for in an auto loan: What is the interest rate? Your approval and/or interest rate is determined by your credit score How long would the loan be for? Remember you cannot sell the car without the lender releasing the title of the car to you and signing off that it no longer has an interest in the car (loan must be paid off) Paying for Your First Car What lenders look for in a borrower Credit Application Your Credit Report/Score Amount of Monthly Income/Expenses Length of Time at Current Address Length of Time at Current Employer Car Information/Value Down payment amount and amount financed How likely you are to repay the loan based on your credit/payment history and current financial responsibilities Co-signer required? Remember that the car you buy becomes collateral for the loan. The lender will have title to the car until it is paid off. If you do not pay, the lender has the right to repossess (take the car away from you). Title and Registration Laws and regulations vary by state In Arkansas, you must register your car and pay sales tax, registration, and title fees within 30 days of the date of transfer or date from which a prior lien has been released Manufacturer’s Certificate of Origin if new, or previous owner’s title if used Invoice or bill of sale reflecting full purchase price Odometer Statement Signed copy of lien contract, if financed Proof of assessment from county assessor Proof of personal property taxes paid Proof of liability insurance coverage on vehicle Payment for sales tax, registration, and title fees State sales tax is 6%, there may also be local taxes Title fee of $10.00 Lien filing fee of $.50 Registration of $19.75-32.75 depending on vehicle weight Automobile Insurance Coverage you MUST have: Bodily Injury Liability – if you cause an accident, this part of your insurance coverage pays for the medical, rehabilitation, and/or funeral costs of your passengers, the other driver and passengers, and any pedestrians involved Property Damage – this pays to repair or replace someone else’s vehicle or property damaged by your car Experts recommend coverage of at least $100,000 per person and $300,000 per accident Recommend coverage of $100,000 Uninsured and underinsured motorist coverage – this covers medical, rehabilitation, and funeral costs for you and your passengers if the accident is caused by someone who has little or no insurance Automobile Insurance Coverage You Probably Need: Collision – pays to repair or replace your car no matter who caused the accident Comprehensive – pays to repair or replace your car if its stolen or damaged as a result of a natural event Coverage for these items kicks in for amounts above your deductible Choose the highest deductible you can afford to pay out of pocket to help lower your insurance costs Personal Injury Protection – reimburses you for lost wages and home care needed as a result of an accident Medical Payments – pays you and your passengers for medical and funeral costs regardless of fault. It will cover injuries you incur while operating someone else’s car and injuries you and your family incur as pedestrians Automobile Insurance Other coverage available Roadside assistance – pays to have your vehicle towed Rental reimbursement – pays for a rental car for up to 30 days if your vehicle is stolen or wrecked Be sure to shop around for the best rates Remember this monthly cost when determining your available budget for purchasing a car Automobile Insurance Costs Based on risk factors (rate the likelihood that you will get in an accident or file a claim) Age; gender; zip code; model, year, average repair cost, crash safety rating of primary car… Ask about discounts (taking a driver safety course, combination auto/home policy, full-time student, maintaining good grades…) No tickets or accidents for 3 years=good-driver discount Note: It is generally less expensive to be included on your parents’ family policy unless you start having problems with accidents or tickets. Real-World Example: 2012 Honda Civic Coupe MSRP: $16,405 Invoice price: $15,122 2% of invoice: $302 Total paid for car: $15,424 $1542 down (10%) Loan: 60 months at 5.24% compound interest ($1928 total interest cost) Monthly payment: $263.50 6% sales tax: $925 Title, lien fee, & registration: $30.25 Insurance costs (based on median rates in 2011): Drivers 20-24: $77/mo Drivers 25-29: $58/mo Upfront cost: $2,476.25 (down payment, sales tax, title, lien fee, & registration) Monthly cost: $341 (car payment & insurance— excludes gas and maintenance) Calculators available at www.edmunds.com, www.kbb.com, etc. Car Maintenance Keeping your car regularly maintained can help prevent bigger problems and bigger costs down the road Three things YOU can do: Have your oil changed regularly Check the engine oil - monthly Check the tire air pressure – monthly and before any extended road trips Regularly wash your car Every 3000-7500 miles or every 3-6 months (check your manual for your cars recommendations) At the same time, check your air filter, exhaust system, brakes, and fluids, clean the radiator, and check the battery Every 2-4 years Drain and flush the cooling system Change the automatic transmission fluid Replace the drive belts and hoses Change the timing belt Car Maintenance Costs Budget a little every month for car maintenance And budget for car repairs Automotive Budget Busters: Tires Heating/Air Conditioning Transmission Clutch Brakes Starter Battery Head Gasket Cracked Windshield Car Rules…Inside and Out Know, understand, and plan to follow the rules of the road Ignore the rules and get caught: Pay a fine to the court Pay for traffic school, if eligible Pay more for car insurance Driving privileges may be suspended Driving privileges may be revoked Car insurance may be cancelled and available only through a high-risk, high-cost insurance carrier Adopt a set of rules for your car and make sure people know BEFORE you NEED to enforce them! Before you go… Please complete and submit your evaluation forms PowerPoint presentation will be posted on our website, with past presentations Budgeting/Money Wisdom Scholarships Credit Cards & Credit Reports Identity Theft Banking & Money Management Thank You! Contact Information: Office of Financial Aid; Andrea, Gary, and Melissa Campus location: 114 Silas Hunt Hall Phone: 479-575-3806 Fax: 479-575-7790 Website: http://finaid.uark.edu/ And find us on Facebook at University of Arkansas Financial Aid!