Robert A. Bonavito, CPA PC

How to Buy a Car Part 3: Costs & Financing

Hi, everybody. Welcome to part three of how to buy a car, where we're gonna focus mainly on the cost, the monthly cost of a car, financing, that type of stuff. Now, in the other parts, we selected that we're gonna buy this here, this Dodge Ram. We're gonna pay, say want $45,000, which is about 13% less than suggested manufacturer's retail price. This is loaded. V8, it's a big car, okay, and we're gonna buy from this dealership. That's where we are. Now, one of the critical things to figure out monthly cost is, you have to decide what type of car you want. Do you wanna lease it? Do you wanna buy it? And, or do you want used? Now, I know, like, a lot of people love to buy used cars because they talk about depreciation and all that good stuff. But the truth of the matter is that when you're buying a... There's no such thing as a used car, because if you're buying a car... If someone has a good car, they don't sell it. They give it to a family member, they sell it to a friend, a family. So, unless your family or... The used car you're getting is probably not that good, okay?

So I never recommend buying a used car, unless it's like $2,000 or $3,000 and you only need it for a year or two. Because a lot of used cars now are going for $18,000, $25,000. Well, I can buy a brand new car for $13,000. In 2019, a new Nissan Versa Sedan cost $13,500. So I'm telling you, why would you buy a used car, even though maybe it's bigger and stronger and, you know, all that good stuff, for $18,000 or $14,000 or even $15,000, when I can buy a brand new car, I get better financing everything, okay? I know this goes against a lot of what people tell you, buy a used car. I've bought new cars, and people have bought used cars at the same type, and invariably, that used car is done within a couple years, okay? I have my car for 10 years. It's much better to buy a new car, especially if you do the research, unless, like I said, if you just need a junker, okay, go and get a $2,000 car. Or let's say you're a mechanic or something like that. Generally, if you don't, you're not a real car person, do not buy a used car.

The next thing is I like new. Why? Okay, one, you know, remember we talked about asymmetric information. If I buy a new car, there's a lot less that I have to learn about the car to figure out what it's worth. With a used car, you have no idea, right? You don't know if it needs a new transmission, it's gonna blow up, you have no... New car, you can kind of figure out what you should pay for it. You get better financing on new cars, you get warranties, you get a relationship with a dealer. Okay, lots of benefits of a new car. And then lease, you know, if you're rich and you want a new car every year, leasing's great. Okay, you know, you wanna get a new Maserati every year or something like that, it's great. Otherwise, leasing is a complete disaster. And the only reason... Dealers love to lease cars. I wonder why? Okay, because it's asymmetric situation that they know a lot more about leasing than you do unless you have, you know, an MBA in finance like I do. Leasing is generally not that good a deal.

There's all kinds of problems with insurance, there's problems with how many miles you can use, what if you get in a car accident. Don't like leasing, okay? Like I said, if you're rich and you need a new car, or you want a second car that you're not gonna put a lot of miles on. But really, for most people out there, buy new, keep it for five or 10 years, okay, because these cars last forever from what I see. So, anyway.

Okay, let's talk about financing, okay? In order to research financing, I like to use, okay. Once you know what type of car, you want to solicit bids online. Use your dummy email through that we talked about earlier. Now, let's go and take a look at this, okay, which is right here. And, now you could see here loans, let's say auto loans, and remember, is a great website, but remember, this is not a paid-for website. So you gotta be really careful of what you're learning here, okay? Because, like I said, they're here to make money, so people who pay to advertise in the site are gonna get better presentation than those that don't.

But there's some good stuff here. Okay, so here's the rates for auto loans. And remember, if you're buying new, you get a much better rate than if you're buying a used car. It's another reason not to buy a used car. And this is what they're saying, 48, 60 months, all that good stuff. Okay, interest rates. So you could see like, used car is higher than a new car in every instance. And you wanna, these, I mean, you know, you shouldn't be paying these, these rates are ridiculous now. But this is what I like here. Bank of America, these are where you get the best rates. I always like to check out what the bank is offering me, and sometimes the dealers have good deals, okay? But you need to understand this. So, let's take a look at Bank of America. Okay, so we have the rates here that has given us. These are what they're saying their best auto lenders are. I always like to use these. So, and I always like to use banks if I can. So let's take a look at Bank of America and see what they have, their rates.

So, here they are. Okay, so they're at 2.4%. That's for 60 months. You know, I'm not gonna get a 60-month loan, but that's... So you could see like right here, you know, if you look at, you know, what they're telling you, they say that it should be for the best credit rating, 4%. Bank of America said okay, you want a new car and you have good rating? We'll give it for under three. So that's why, you know, Bankrate is great, but look for those little hidden gems, like I'm gonna get it, if I'm gonna get a loan, you wanna get pre-approved, you wanna be able to have this all set up, so when you figure out what car you want, you're probably gonna use Bank of America in this situation, because their rate is pretty low from what I see. So, we're gonna probably get this close to 2%, okay. So now, we kind of understand where our bank is, our bank financing. And I'm just gonna show you some things here that you may wanna make sure you understand. Because here is a spreadsheet, and you can... Everybody should use a spread... I mean, Google Docs has spreadsheets like this, you don't have to use, you know, Excel and stuff, but you need to know how to use your calculator, you need to know how to use a spreadsheet.

So, when you're buying a car with the financing, okay, you should never pay more than 40, than 20% of your take-home pay. So, let's say your take-home pay is $4,000. You should never pay more for the monthly loan than $800, which is 20%. Keep that rule of thumb in mind. So let's say that I said I wanted to buy that car for $45,000, right? The 2020 Ram 1500. Let's say I'm gonna put down a payment... Wait, this is gonna be $45,000, and you can build these sheets yourself. Down payment, okay? We're gonna get this rate at 2%, okay. So, you could see here that the payment for this truck, based on paying $45,000, that's all in, I have the dealership picked out, I have the car picked out. I'm gonna put down $8500, I'm gonna finance 36, I'm gonna get a 2% rate from Bank of America, and I'm only gonna do three years. Whoa, that's not good. It's way, it's, you know, 200...

So, I don't like to do more than two years. I may have to put more money down. Let's put $12,000 down. No, let's put... We're gonna have to, wow, we're gonna have to put $15,000 down. Yeah, this is not gonna work. We may have to do a four-year loan, which I don't like. Let's do $10,000 down. Okay. So, here we have a four-year loan, which is not good. We're paying $1400 in interest, total payments at $36,000. So, we have the car, we have the financing, we know we can afford this payment because it's under 20% of our take-home pay, right? And these sheets are very easy to build, but you need to understand the financing, okay? Because you don't wanna go into the dealership not understanding this. But, people like to take six-year loans, okay? So, for this one here, it's, right, the interest is this, our total payments are this, right? Let's see what happens when we change to a six-year loan. Okay, the interest doubled almost, okay?

You know, so I'd like to generally keep this at three years, but that's way over what we can afford, so we're gonna have to do a four-year payment, right? So, just, you know, understand, especially this right here, they were telling him it was gonna be 4%, right, at, if you just went there to that website and you didn't do some more research. And look at the interest rate on a six-year, okay? It would be $4,000 to $4,426, okay. Over 300% more, and you gotta think of percentages, like I said, when you're dealing with a dealership, because they'll say it's only $15... No. I can only afford $800 a month, okay? And I'm not gonna pay $4,000 of interest, okay, over six years. No. No, I'm not gonna do it, okay. I wanna do a four-year loan. I would love to do a three-year loan. That's the best, okay, because that takes us down to... But my payment's too high, right? So, I'll do a four year, but I want the interest rate at 2%. Okay, and remember, you guys could stop the video and figure this out.

So you understand now what you're paying. You have your bank financing, you know the car dealer, you know the truck I want. Everything's done, right? I'm gonna walk in there and, you know, basically do this negotiation. So, let's get back to this financing and monthly expenses, and that kind of goes through your monthly expenses, okay. And once you know the type can solicit bids on [inaudible 00:11:35]. You know, we're gonna get more bids and we may even be able to get the truck less than we want, right?

And the other thing is, remember that when you buy a new car, okay, you need to get insurance, because you have a loan. You owe the bank $35,000. And you better call up your insurance company and just see what the insurance is before you go in and buy the car. Tell them, "I'm gonna buy this car. What is the insurance?" Because they're gonna want collision, which costs a lot of money, okay. After four years, that's why I like a three-year loan here, I can drop the collision, which is usually the biggest part of the insurance, right?

So here, with a four year, and I have to keep collision for four years, but usually, when you get a new car you wanna have collision anyway. So, see what that is. Now, with this you know the interest expense, you know your monthly payment, you know your car, what the insurance is gonna be. And then there's probably some kind of licensing fees in your state. So you kind of understand this is what I...this is my cost, but generally, if it's 20%, the payment is 20% of your take-home pay, you should be able to afford it, okay? So, that is the end of our part three. If you guys have any questions, you know, please leave a comment below. I'll get back to you or one of my analysts will get back to you with an answer. And, you know, if you want to subscribe to my YouTube channel, I'd really appreciate it. Thanks a lot.

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