How to Save Money When Buying a Car

Other than a house, a car may be the most expensive item you buy. The gulf between the most and least expensive car is enormous. So how do you save money on a car purchase? Let us count the ways.

But before we begin, I should explain my expectations for a car. A car, for me, is a tool. I would liken it to a wheelbarrow, but that wouldn’t be fair to my wheelbarrow. My wheelbarrow has outlasted two cars, and its consistent performance has earned it a special place of trust in my heart. A car can only hope to someday be deemed as reliable.

The primary goal for my car is to successfully get from Point A to Point B. In terms of amenities, air conditioning is my only must have (and if I lived somewhere cooler than Texas, I might pass on that). I’ve owned five cars to date, and my favorite – by far – was a no frills (it didn’t even have power windows or doors) 1996 Pontiac Sunfire. It’s the standard against which I judge cars, and most fall way short.

This guide may not work as well for people who need an awesome ride to shame the neighbors, impress clients or the ladies, or earn envious stares at stoplights. And that’s OK – we need those folks to help support the economy, because I’m clearly not doing my share.

But if you view your car as mostly a tool, these could help.

New v. Used

Buying a gently used car is a great way to save, all things equal.

The rule of thumb that’s still bandied about is that a car will lose 20% of its value as you drive it off the lot. So don’t buy new cars I guess. End of lesson.

However.

I have a confession to make. I only buy new cars, and some of my reasons are worth considering when you’re weighing new v. used.

First of all, regarding that 20% haircut you suffer as you drive off the lot, I’ll ask, “20% of what?” The price point for my target ride is pretty low, so while there are savings to be had, they are more modest. Plus, the 20% is an average. It might be higher for the popular cars (esp. leases) that get turned over quickly, but it may be less for the kind of unsexy beater I often buy.

I’ve looked at enough pricing on sites like CarMax to say the only real way to achieve meaningful used car savings is in a private party transaction. And here is an ugly truth about those: you have to buy from a private party. Your selection will be more limited, you may have to deal with crazy people, and you’ll need to invest a lot more time to get a great deal.

Plus, I’m so risk averse with car troubles that I want to delay their start for as long as possible. While I might save serious money buying a two year old car, I feel like I’m bringing that day of problems and stress two years closer. It’s worth a premium to me to buy new.

So I’ll concede that I lose by not buying used cars, but I like to think I gain everywhere else in the process.

Finance v. Pay Cash

With one exception, I’ve always paid cash for my cars. (I financed a small portion early on to build my credit history.) A car loan is after-tax debt, so it’s never made sense for me. Assuming you have adequate funds, paying cash for a car is a great way to save some money.

Writing a check for a car purchase is also a great form of discipline. While lots of folks can easily justify blowing a $500 (or more) hole in their monthly budget, they’ll balk at writing a $30K or $40K check. As they should. If you can’t afford to write a check for a new car, try buying a cheaper car (I’ve heard you can get a great deal on a used one…).

Some people will counter that they got a great deal on financing – 0.00% or whatnot. Why wouldn’t you take that free loan? My limited experience with below-market finance rates is that they are an incentive offered by the manufacturer to the dealer. And both times I explored it, the dealer had a different cash incentive (e.g., $500 extra off the purchase price) for me for not financing with them. I’ll take the lower purchase price, thank you.

There are also cases where a dealer will offer you a market interest rate but give you a cash incentive to take it. That’s simply a spreadsheet exercise – if the purchase price savings exceeds one month of interest (and the hassle of getting the loan), then finance the minimum needed for the incentive and pay it off immediately. But that’s tactics, not strategy.

There is almost always a portion of my portfolio that is in cash or near cash, and those funds will always earn less than I’d pay for a car loan. Paying cash for a car is therefore a great way to save on a car purchase.

“Make” and “Model” Arbitrage

Many a car family has multiple siblings. There’ll be a base brand – often the parent company name – and at least one premium, luxury brand. Volkswagen / Audi. Toyota / Lexus. Ford / Lincoln. Honda / Acura. Nissan / Infiniti. And so on.

The parent company will go to great lengths to distinguish the luxury brand and make sure it justifies a significant premium and appeals to status-conscious snobs refined buyers expecting the absolute best in quality.

They’ll invest a lot in the interior (leather seats, butt warmers, entertainment systems, cup holders, etc.). They’ll also make sure the metal “skin” of the luxury car looks different and super awesome. Sometimes they’ll even have fancy tire valve caps!

But what they won’t do is invest a lot of money under the hood. Most of the time, a premium car shares the same engine, chassis, and drivetrain with one or more of its more pedestrian siblings. Those core components are ridiculously expensive to develop, so it makes sense for car companies to share the technology across as many models as possible. Especially when they’re able to fool most consumers into paying a lot more for the premium line because it’s perceived as a much better car.

But is it? I’d argue if two cars share the same engine, chassis, and drivetrain, they’re basically the same car. One might keep your butt warmer and impress your neighbors more, but they should be remarkably similar in getting you from Point A to Point B.

It’s pretty easy to find when your target vehicle has a twin – assume there is one, and you’ll probably find it mentioned on wikipedia or a detailed review of the car. Twins exist both across and within makes (and sometimes even across companies), and you can save a lot of money by buying the cheaper of the two.

Smaller Vehicle

I know that the market is in love with big monster SUV’s, but there are huge savings to be had if you can buy something smaller. There’s still a small portion of the market that sells these miniature vehicles – they are known by the somewhat archaic term of “car”.

And the savings aren’t limited to the purchase price. They typically cost less to insure and have better gas mileage.

Some people may argue that an enormous V8 SUV is safer in an accident, but so is a tank. Driving around a car that is twice as big as I need on the hopes that it might be safer in a collision doesn’t make a ton of sense to me.

Manual v. Automatic

This is where the magic happens. Driving a manual transmission is a lot more fun than an automatic, even in some of the pokey cars I’ve owned. In fact, in an underpowered car, a manual transmission can make the rare instance when you need a boost (e.g., a short on-ramp to a highway) a whole lot safer. I’d be willing to pay a modest premium for a manual transmission.

But I don’t have to! Manual transmissions are cheaper than automatics. In cars with a base model manual transmission, you’ll typically pay a minimum of $1,000 to upgrade to an automatic. And if your car only comes in an automatic, it already has that premium in its price. Manual transmissions tend to be less complex as well, which means a lower risk of problems down the road.

What’s not to like? Well, for one, you need to know how to drive a manual transmission, and that is indeed a dying art (at least in the U.S.). Automatics have finally closed the gap where they are more fuel efficient than manuals, but that gain has come at an enormous cost of complexity in automatic transmission design. You also might get less for a manual when you sell or trade, but that is as expected since it cost less in the first place. I haven’t had any trouble unloading my last three manual transmission cars, and since my goal is to drive cars into the ground, I don’t care much about residual value anyway.

A manual transmission gives me a better car at a lower price, which is a great way to save.

Fully Loaded v. Base

The base model of almost any car sold today has everything you need, and actually includes many features that were once expensive options. It may not have everything you want, but those wants come at a very steep price. The closer you can stay to a base model, the more money you’ll save.

So What Did I Buy? The Filters, Applied

Recently I got tired of my problematic Mini Cooper Countryman, and I was ready for something new. I don’t really care what folks think of my ride, so I just wanted something reliable and cheap.

And when I say cheap, we’re not just talking Honda Civic or Mazda 3 prices. I wanted our neighbors to think we were in financial trouble. The Hyundai Accent (MSRP $13,995) and Chevrolet Sonic ($15,420) were in play. And lest you forget, I’m a 40-something dude.

However, the missus stepped in to be a voice of reason. She was OK with me buying something inexpensive on one rather stiff condition: it had to be a Subaru.

The missus and her family are Subaru people, you see. I could relate, because I grew up in a GM family back when that was a thing. The lowest end Subaru is the Impreza, and it was mentioned as a meaningful competitor to some of the cars I liked (esp. the Civic and the Mazda 3). Research showed it to be a good buy. Also, as a safe small car more appropriate for a teenager than a super old dude like me, it could potentially pass to my eldest son when he starts driving in a few years.

The main knocks against the Impreza was that the engine was a little pokey and the CVT automatic transmission had issues. Pokey it might be, but it was still a 30 HP upgrade over my similar sized Mini (everything is relative!), and my test drive was fine. And problems with the automatic transmission didn’t concern me 🙂

So with basically one model in play, I avoided the Paradox of Choice and probably saved scores of hours researching every cheap car in America. I pulled the trigger two weeks ago and am the proud owner of a new tool to get from Point A to Point B.

How did my Impreza do on my criteria? Let’s see.

New v. Used – FAIL 

I bought a new car so everyone can make fun of me and I will never be allowed to claim I’m frugal again. But I do think I would have had trouble finding a completely stripped down base used car. I would have saved money buying used that I’d then hand back for features I didn’t want.

Finance v. Pay Cash – SUCCESS

I paid cash and got an incentive for doing so.

Make / Model Arbitrage – SUCCESS

In a moment of wild abandon, I considered buying the Crosstrek, the next car up in the Subaru family. And then I learned it had the same body and engine as the Impreza but starts about $2,500 more.

Smaller Vehicle – SUCCESS

I know I’m in the minority, but I like small cars, and the Impreza definitely qualifies.

Manual v. Automatic – SUCCESS

I knocked $1,000 off the price from the start because I found a manual on the lot (and I think I was the only person in North Texas interested in it…). When you consider that the inventory of used Imprezas is limited (with no manual transmissions) and I saved over 10% by this act alone, the used v. new argument does lose some steam.

Fully Loaded v. Base – SUCCESS

My car is as base as it gets. I don’t have the fancy EyeSight system (it’s OK because I know how to drive a car), I don’t have a butt warmer (I hate those, btw), my mirror is just a mirror, my tires are the smaller size that’ll be easier and cheaper to replace, and so on.

Overall I’m really happy with the new ride and feel like I’m finally getting back to the basics. I paid less than half the average price of a new car in the U.S., and my purchase even feels competitive with the used car route. Only time will tell whether my Impreza can join my Pontiac Sunfire and my wheelbarrow as a trusted and reliable friend, but I like its chances.

To ensure I squeeze every last drop of value out of this car buying experience, I’m going to present my negotiating strategy and tips for buying a new car in an upcoming post. Stay tuned!