Scott On Money: Car buying Archives

Yellow Lamborghini at Denny’s

I was out getting dinner the other night and I noticed a yellow Lamborghini parked at Denny’s. I thought about the person that owns that car and where they were eating. For those of you that may not know the car likely cost over one hundred thousand dollars. For those of you that don’t know eating at Denny’s will cost you eight to ten dollars.

I think about cause and effect. Did this person live a frugal life and set aside money to fulfill their dreams? Did this person as a kid have a yellow Lamborghini on their wall? Did this person decide to eat at Denny’s instead of pricier dinner options to save to make their dreams come true? Could be.

Did this person go into massive debt to buy a Lamborghini on impulse? Are they forced to eat at places they don’t like just to stay above water and pay off their debt? Will they be able to keep up with the bills if they lose a job or have health problems? Could be.

I present two completely different speculative, lives. Which would you choose?

Gap Insurance, From Your Lender?

I previously posted on the gap insurance my dealer offered when I was purchasing my car. I finally got around to signing the loan documents yesterday. I was pleasantly surprised that they included something called “Total Loss Protection”. What is it? It looks a lot like gap insurance to me. Who did I get me loan from? USAA. Definitely add your lender to the list of places you look for gap insurance.

New or Used?

Of course there are those that suggest not buying a new car. The Millionaire Next Door supports this view. Seems millionares simply don't waste money on buying new.

I hate car trouble. I hate taking the car in for regular service. Because of that I wasn’t comfortable buying a used car on the open market. I looked at the various certified pre-owned programs. While they were mostly impressive in terms of protection they just didn’t offer the cost savings I was looking for. A 5 year old 70,000 mile car is worth less than a new car for a reason. You have to consider wear, the more limited warranty and of course the uncertainty of what the vehicle has actually been through.

I tried to buy a car that can last a decade. We will see!

True cost of owning a car

Nickel gives a pointer to the edmunds.com TCO reports. In my case these didn't help much since the Civics just came out. But if you are looking at a more established car or are looking later in the year these promise to be helpful.

Dealer Gap Insurance

One of the many things I was offered as I was trying to get the deal closed was gap insurance. Gap insurance makes up the different between what you owe on your loan and what your insurance company will actually pay you if you have a claim. In my case if my car was totaled or stolen I might be out $2000 for the lost value in the car (depreciation) $1000 for the deductible and $2000 for the taxes (I financed everything).

The dealer offered me gap insurance for $1600. Is this a good deal or not?

The quick answer that I had from how hard it was pushed was absolutely not. There is a way to look at this that gives you a better idea than just a gut feel. There is a little math but I promise you it is very simple.

Case 1: The car is stolen or totaled
I’m out $2000 for the difference between the cars value at what a new one costs.
I’m out $1000 for the deductible.
I’m out the $2000 I spent on taxes.
Outcome: -$5000

Case 2: The car is not stolen
Outcome: $0

Case 3: The car is stolen or totaled with gap insurance
I’m out $2000 for the difference between the cars value at what a new one costs.
I’m out $1000 for the deductible.
I’m out the $2000 I spent on taxes.
I spend $1600 on the gap insurance.
The gap insurance pays me $5000
Outcome: -$1600

Case 4: The car is not stolen with gap insurance
I spend $1600 on the gap insurance.
Outcome: -$1600

So now we need to decide what the chance of totaling the car or having it stolen are. I don’t know the statistic but I’m sure it is not more than a 5% chance.

Expected result = Chance of occurring * value (for each outcome)

For gap insurance we have:
Expected result = 5% * -$1600 + 95% * -1600 = -$1600

Without the gap insurance we have:
Expected result = 5% * -$5000 + 95% * 0 = -$250

First note that you will always come up with a negative number when doing these insurance expectations since you are paying the insurer to pay their staff, make a profit etc.

Second this is only an example. I didn’t bother with the details of this policy since it looked so bad. Be sure to carefully check the details of any insurance policy. You’ll be pretty upset if you pay for gap insurance, incur a loss, and they have an exclusion preventing you from collecting.

Finally check around. Your financer or insurance company probably has a far better deal than the dealer will give you.

Buying a Car

I just bought a 2006 Honda Civic. The experience was well, interesting. The Civic is redesigned this year. I would have been happy to get one for MSRP, but many of the dealers here in San Diego were quite adamant about marking up the cars by $2000 and then adding on $1000 of useless options (you can buy at an auto parts store retail for just a shade over $100). I probed some of the salesmen about these markups and they didn’t really seem interested in moving.

I finally decided to make the move. I was determined to get the car I wanted for less than MSRP. I took in looked at Edmunds to get an idea of what people were paying at what the dealer invoice was.

I found a dealer that was not insisting on the $2000 markup that had a car in a color that was suitable. After test driving the car I grabbed my Edmunds papers and loan paper work*. The car still had the $1000 of typical options. To give you the full numbers:
Invoice: $16,800
MSRP: $18,700
Options: $1,000
Asking price: $19,700

My goal was to beat the MSRP by at least $100. I opened the negotiation at $18,400. There was talk and talk about the worthless options. Finally, after repeatedly expressing the utter worthlessness of the options, I pressed the salesman for his response. MSRP! No we are getting somewhere! I offered to split the difference with him or leave. He accepted: $18,550. I hit my goal.

My thoughts:
• I beat my goal, but I don’t think the goal was aggressive enough.
• Don’t pay for something you don’t want unless it is somehow to your advantage.
• Research pays. I quoted him invoice from memory and had the paperwork to back it up. I think this undercut a substantial amount of gamesmanship.

To follow:
• Get financing you can trust.
• How far would you go to get what you want?
• The dreaded sales manager.

*I had prearranged this. More on this subject later.

Scott On Money

October 20, 2006

Yellow Lamborghini at Denny’s

October 16, 2005

Gap Insurance, From Your Lender?

October 13, 2005

New or Used?

October 12, 2005

True cost of owning a car

Dealer Gap Insurance

October 11, 2005

Buying a Car