The new rules of car buying
You've seen the headlines: automakers on the brink, sales slowing to a crawl, credit tighter than ever. Yet amid all of this gloom there's a silver lining: deals of a lifetime. But to snag one, you have to learn how to navigate today's uncharted market.
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(Money Magazine) -- You can hardly escape the grim news surrounding the car industry: an 11th-hour federal loan package to help General Motors and Chrysler survive to the new year, frugal consumers shying away from big-ticket purchases - especially four-wheeled ones - and tighter credit making it tougher for the few willing buyers to borrow. November auto sales plunged 37% from a year earlier, according to Autodata, a sales tracking firm. Even after production cutbacks, ports are stacked high with new cars that can't fit on dealer lots.
Where there's an inventory glut, there's a fire sale, and that's great news for you. Desperate car makers are begging you to buy with extraordinary deals, from 0% loans to more than $7,000 cash back. "The level of incentives is unprecedented," says Jack Nerad, a market analyst at car-price publisher Kelley Blue Book. "It is almost mind boggling."
Rebates and low-interest loans are nothing new, of course. What's different today is how large they are - and how widespread. Last summer, with gas at $4 a gallon, the incentives were limited mainly to gas-guzzling SUVs and trucks. Now you'll find deals on small cars too.
Even foreign car makers that rarely, if ever, offer such sweeteners have jumped in, although their discounts aren't as deep as Detroit's. You could recently get $1,750 cash back on a Nissan Altima and 1% financing on virtually any Acura. "Toyota just hasn't had to use incentives, but in November they had record incentives," says Philip Reed of Edmunds.com, a car information website. Want a fuel-efficient Corolla, one of the best-selling cars in America? Toyota has been knocking as much as $1,500 off the price.
Today's deals aren't limited merely to incentives. You can and should negotiate hard. Before you shop, go to kbb.com or edmunds.com to see what the car is really going for. And find out what loan rate you qualify for at a bank or credit union. With good credit you wield vast power in the negotiations, says analyst Tom Libby of J.D. Power & Associates.
Finally, when deciding between cash back or a low-rate loan, consider your time frame. Cash will usually beat cheap interest if you plan to get rid of the car or pay off the loan within three years. To do the math, use the calculator at edmunds.com.
The credit crisis has hit auto loans too. "The availability of credit is worse than it was six months ago," says Libby. GMAC, for example, no longer lends to borrowers with subprime credit.
But as long as you have good credit, you can still borrow to buy a car. Today's median credit score is 720, and the auto-loan world looks different depending on which side of that line you're on. With a score below 720, you'll find that no-money-down deals are hard to come by. You'll likely need to pony up at least 10% to 20% of the price, says Jesse Toprak of Edmunds.com.
But with a score above 720, tighter lending rules simply mean that you could end up in a shorter loan than you might have a year ago. Lenders are pushing loans no longer than five years. Six- and seven-year loans are now tougher for all borrowers to find - and more expensive if you do get one (you'll pay as much as a percentage point more vs. the five-year rate). The upside: You'll pay less interest overall, and you're less likely to owe more than the car is worth when you sell.
Finally, as a good credit risk, you'll qualify for an interest rate as low as 6% on a five-year bank loan and less than 5% at some credit unions.
The ridiculously low-cost leases of the past decade let Americans drive far more expensive vehicles than they could have afforded to buy. Those days are over. Lease payments are closing in on loan payments for the same model, wiping out leasing's biggest advantage.
What's killing the market is that the cars coming off of leases are worth far less than car makers had originally estimated (your lease payments cover expected depreciation plus interest). To stem their losses, Chrysler Financial and GMAC have cut back or even suspended leasing programs. At the banks and car makers that still offer leases, including Toyota and Honda, you'll need good credit to qualify and your payments will likely be significantly higher than in recent years, says James Bell, editor and publisher of IntelliChoice.com, a car information website.
Luxury brands such as BMW and Audi are the exception. Because so much of their business hinges on leasing, luxury-car makers haven't raised prices as much and probably won't, says Richard Apicella, an auto finance industry consultant at Benchmark Consulting International.
Leasing had none of these troubles a few years back. Now the contracts on the thousands of cars, trucks and SUVs leased in 2006 and 2007 are up, and two- and three-year-old models are returning to packed dealer lots, giving you yet another chance to score a deal.
Because cars lose most of their value in the first or second year, these gently used vehicles are among the best values you can find. For the price of a new Toyota Camry, for example, you can drive a 2007 Volvo S40.
Typically, the dealer will inspect a formerly leased car, tune it up, slap on an extra warranty and market it as certified pre-owned (CPO). Every major brand now has such a program, and CPO sales are up 30% since 2002, according to Autodata. "It lets you know that you don't have to be concerned about buying a lemon," says Lenny Sims of NADAguides.com, a car information website.
That peace of mind isn't free: On average you'll pay about $1,000 more for a CPO than for a plain-vanilla used car, and $2,500 more for high-end models, according to IntelliChoice.com's Bell. Before you pay this premium, make sure it's a manufacturer CPO program, not one run by the dealer. And check how much longer the warranty extends beyond the original factory one. You want another few years, not a few months.
Finally, push to lower the price enough to cover this added cost. In today's beaten-up car market, you have the power to negotiate on everything.
The future of Detroit is anything but certain. GM (GM, Fortune 500) and Chrysler are on the ropes. Ford (F, Fortune 500), in better shape than its rivals, has warned that it might need federal aid if another car maker fails. And because U.S. manufacturers and foreign automakers with U.S. plants all rely on the same parts makers, a Big Three bankruptcy could push suppliers under, further damaging the industry.
So would you be crazy to buy a domestic model, even if it's a steal? No, but you'd better know the risks. The first is that you'll run into trouble when your car breaks down. That risk is small. Car makers will likely do everything possible, even in a bankruptcy reorganization, to continue to honor warranties and provide parts, says Kelley Blue Book's Nerad. If they are trying to stay in business, they can't afford to lose consumer confidence.
Even in the case of an outright failure, whoever buys the bankrupt firm's assets will likely stand behind the warranties and continue to stock parts, Nerad adds. Do you have a guarantee? No. Today's crisis is unprecedented. In the end, you have to decide whether the deal is good enough to outweigh even a small chance of repair woes later.
The bigger risk is to your car's value. No matter what, a few brands may be killed off, and if that happens, experts predict, those orphan vehicles will depreciate faster than usual. So if you tend to hold on to a car for only a few years, stick with a brand with a more certain future or a top seller that is unlikely to disappear, such as a Cadillac CTS.
Got a question about the crisis and your finances? Email Money magazine at money_letters@moneymail.com.
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