BUYING A CAR? Avoid Dumb Financial Decisions
Lets face it – a car is not an investment, so if you are trying to improve your financial status, owning a car is not the best way to go.
Lets face it – a car is not an investment, so if you are trying to improve your financial status, owning a car is not the best way to go. In fact, for many people buying a car may be one of the most stupid things they ever did. Although people know owning a personal car can be a major cost and a big dent to their financial well being, they will still go ahead and buy one even when they cannot afford it. Why? People love cars; they are a status symbol – it is prestigious to drive than depend on matatus; they make our lives easier; and who wouldn’t want to say ‘this is my car!’ So, what makes a car a poor investment? The average new car loses on average five to 10 per cent of its value each year – meaning, if you buy a new car worth two million shillings today it will be worth between one and 1.4 million shillings by its fifth year. Can you think of anything else you would buy with two million shillings that loses value so quickly? May be clothes. Can you also imagine how much a property worth two million shillings would appreciate in five years?
The other reason a car becomes a poor investment is that it is a consumer – a big consumer of your hard-earned cash. A car wouldn’t move without gas and gas prices keep going up; you will need insurance and regular servicing. And if you drive into town, not only will you spend hours looking for parking, but you will also pay heavily to park. The contradiction of owning a car in this country is that many car owners cannot afford to drive every day, so they park them at home and take public transport. A car, therefore, remains a very expensive asset that sits at home and depreciates. Does this make any economic sense?
But that said, owning a car if you can afford it, is a practical thing as more than anything else it gives you the comfort of travel and you are able to schedule your movements and timing. So let’s look at what you need to bear in mind when you go out to buy a car.
The best financial decision to make when buying a car is not to buy a new one. It makes more sense to buy a second hand car that is well maintained and in good condition. You will be reaping the depreciation benefits of a new car in terms of the price you pay. While this may make some financial sense, not many people are ready to buy mitumba when they can get a loan to buy the prestige of a new one. For better or for worse, we live in a car-centric culture, where everyone dreams of owning a car.
SHOPPING FOR A CAR…
Whatever choices you make you need to remember it is important to be practical when buying a car. It is also important to bear in mind that there is no significant correlation between the make of car you drive and the level of your happiness or satisfaction with life – so buy a car for transportation not a status symbol. Buy a car that will serve you practically within your financial means. Don’t worry if others call it a ‘junk’ as long as it serves your purpose.
If you choose to buy a car from a dealership, be wary of car salesmen. While many are honest and hardworking and do their best to provide you with the best service at a fair price, there are plenty who use high-pressure tactics to make you part with as much money as possible.
Others will push a car down your throat even when it’s not worth the price. You need to resist such tactics.
Before you set foot on a car dealership, figure out which makes and models you are interested in. It’s best to give yourself at least three options because if you have set your heart on just one model, you are more likely to become emotionally involved with the deal, which puts you at a huge disadvantage. Once you have narrowed down to a handful of models, check their reviews and find ownership, maintenance and accident history.
Know exactly which cars you are considering and why, and be familiar with prices and options. The more information you have, the more bargaining leverage you have got. Also, the more time you give yourself for shopping, the better the deal you will get. If you feel rushed by the seller to close the deal and you are not sure, the best thing you can do is stop and take a breather. Come back the following day if you are still interested in the deal. When you feel hurried, the seller gains advantage.
Some people are afraid of buying old cars because they are scared of heavy maintenance costs and their reliability. While these concerns are understandable, you can reduce the risk by being a smart shopper. If you feel more comfortable buying from a dealer than an individual, consider one that has been checked and valued by a reliable company such as Automobile Association of Kenya (AA).
Also ensure it has gone for a thorough mechanical check by a reliable and independent company.
When buying a used car, there are a few things to keep in mind:
*Research reliability. Find out if the model you are interested in is reliable and if it is still being manufactured. Find out the cost of spare parts, their availability and reliability of service providers.
*Know the value. Get it valued independently and checked for mechanical defects.
*Ask questions. Whether you are buying from a dealership or an individual, find out as much as you can about the car. How many owners has it had? Has it ever been in an accident? Are all the maintenance records available? What sort of gas mileage does it get? Why is it for sale?
*Inspect the car thoroughly. Check the interior, exterior, tires, body and engine. When you test-drive it, pay attention to the handling and acceleration, and listen for strange noises.
*Check the papers. There are many stolen vehicles in the market. Don’t burn your fingers by buying one. It could land you in big trouble. Check all the documents such as logbook and ensure they are authentic. Verify the person selling the car is the owner or has mandate of owner to sell. Ensure chassis number matches the one on original documents. Also ensure number plates are genuine. If you don’t know how to go about these checks, commission a professional to do it. It will cost you money but it is better to be safe than sorry.
*Make an offer. Start below what you think the car is worth and work up from there.
*Trust your gut. If something bugs you about the deal, call it off.
Go for a test-drive…
Always ask to test-drive the car you want to buy. It’s easy to get excited when you are shopping for a car and forget to test-drive. If you are not well versed with cars, ask someone who understands cars better to come with you. A test drive does more than test whether you look cool behind the wheel. You want to see how the car behaves under normal conditions. Don’t just test drive on the highway, get off-road and see how it behaves when you hit a few bumps. There are some other things to keep in mind during the test drive: How does the car handle? Is it comfortable? Do you feel safe? If something bugs you about the car in the first few minutes, it will just get worse with time. Ask as many questions about the car as you have. Remember, there are no stupid questions.
Guard your emotions during the test-drive as you could get emotionally attached to the vehicle and convince yourself you have to make the decision to buy straightaway – you could easily get ripped off by a smart sales person who will play on your emotions. It is important to keep your emotions out of the negotiations. When you feel you must have something, you end up paying more for it. You put yourself in a position where the seller can manipulate you with ease.
ARRANGING FINANCING…
An important step in buying a car is to figure out the finances. It is best to pay cash if you can instead of taking a high interest loan to finance an asset that depreciates with time. The other way is to look for cheap financing – if your employer has a car loan policy, that may be your best bet. Ensure your financing is in order before you start negotiations. If you intend to buy your car on a loan, be smart about how much you borrow. When you know how much room you have in your budget for a car payment, it is much easier to manage your expectations so you don’t drive off with a car you can’t afford to keep.
MAKING A DEAL…
Once you find a seller who has the car you want and you have the money, it’s time to start haggling. Here are some things to keep in mind: *Don’t start negotiations from the ticket price. Because you have done your research, you know roughly what the dealer or individual paid for the car and how much it has depreciated by. Use these facts as your starting point of negotiations.
*If you are paying cash. Make this a bargaining point to get the best price, as the seller does not have to wait for paperwork from financiers.
*Get a valuation. AA gives reliable valuation at a small fee so take your car there. Don’t buy without getting independent valuation but remember this is only to give you an idea of its worth, but by no means what you should pay.
*Stay in control. Remember you are in charge. Don’t let the seller take charge. The seller will do everything he can to get you to buy the car immediately but you don’t have to walk that route. He wants you to feel pressured. He may even tell you there is someone else interested and if you don’t close the deal you could lose it. If you are not emotionally attached to the car, you don’t have to buy when the seller wants you to but when you are ready.
*Be willing to walk away. Sales people can be sneaky and are apt to introduce new fees or terms into the deal before closure. Don’t be afraid to walk out on the deal.
THE ART OF NEGOTIATING…
Many people don’t like to haggle but negotiating is an important skill that can have a huge impact on your financial life. When negotiating you need to control three crucial variables:
Power. You can gain power in a negotiation by generating competition through bidding for more than one car from different sources. Other tactics to use include persistence, precedence and empathy. Silence also works – not saying anything at all will often cause the other side to continue negotiating, as if you have made a counter offer.
Time. The side with the most time has the advantage, so no matter how rushed you are, keep your cool. Don’t ignore deadlines, but don’t follow them blindly either.
Information. The more you know, the better off you are, so do your research before you start haggling. And during negotiations, act on whatever new information comes to light to get a better deal.