Minnesota Attorney General's Office
1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101
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The Car Handbook
So you want wheels. And you want the best deals on wheels. You’ve come to the right place. The Minnesota Attorney General’s Office has compiled the latest research and tips on buying cars, with crucial information concerning your legal rights as a consumer. We hope we’ve provided the information you’ll need to make a deal that you’ll be happy with.
For most of us, buying a car is the largest purchase we’ll ever make besides a home. Today a new car will likely cost over $20,000, and, because it is legally binding, the purchase should be very well-considered.
Unfortunately, we in the Attorney General’s Office hear from remorseful car buyers every Monday morning. Again and again our phones ring with the question, “Can I return the car I just bought this weekend?” Our answer is almost always, “No.” There is no three-day cooling-off period in which to reconsider a car purchase as there is with some other purchases.
Avoid being one of our Monday callers by doing your homework before you buy a car. In this book, we provide guidelines and references to help you decide what kind of car to buy, what you can comfortably afford, whether to buy a new or used car — or lease one instead, what options and extra protections to purchase, car rental practices to be aware of, and how to maintain your vehicle without getting run over in the process.
Car buying is intimidating to many people. For instance, how many of us know the difference between three and four cylinders? If air bags are fail-safe? Or whether an extended warranty makes sense? If you aren’t car savvy, or are a little rusty on car mechanics and the latest dealer practices, you may appreciate a few tips and pointers.
We’ve written this book to be comprehensive enough to give you the tools you need to make a good car buy. But if you need more information about auto buying, don’t hesitate to pick up the phone and call us at 651-296-3353 or 800-657-3787. We’d rather hear from you now than “the Monday morning after!”
Buying New vs. Used
Do you feature yourself tooling around town in a gleaming vehicle with the latest options? Were you on the crest of the wave with your bright-red hot rod at age 20? Would you feel inferior today without an impeccable interior to show your business clients? Then you probably won’t be fulfilled without a new car.
But buying new isn’t only about image. New cars have safety features that are constantly being improved. They may be less likely to rust because of better rust protection. And they’re virtually problem free. With a new car there’s less risk of being stuck on the highway at 20 below zero with a transmission that just went out. If something does go wrong, it’s usually under warranty for several years, so you won’t have to pay to fix it unless you have a deductible written into your warranty.
On the other hand, buying a new car is a financial risk. You can’t know how much your car will be worth several years down the road. It will lose hundreds or thousands of dollars in value over the first two years, but you may still be paying off a loan based on its negotiated showroom price.
Many car experts say you’ll come out best financially if you buy a car that’s a couple of years old, after the major depreciation has occurred. Even with the cost of repairs, used cars cost less to drive. With these savings, you can stash some cash for repairs and still come out ahead.
When deciding whether to buy a new or used car, ask yourself if you have the temperament to drive a car that needs periodic maintenance, or if you’d rather spend more money up front for a car that is warranted to deliver a reliable ride.
Buying vs. Leasing a Car
Buying is more traditional. But bold headlines keep telling you that you can lease a brand new sedan for $259 a month, or a four-wheel-drive truck for $299 per month! However you won’t own the vehicle, if you lease, you’re really just renting a car for the long term.
So is buying more practical? There isn’t an easy answer. No matter how you look at it, leasing and buying aren’t easy to compare. Take some time to read Chapter 7: “Get a Lease on Leasing,” in which we’ve identified some ways to compare leasing and buying by calculating your monthly payments and looking at the long-term costs of each.
This is only an overview of the issues you’ll face in determining whether to buy a new or used car, or choose instead to lease. Read the chapters concerning each of these choices before you make your decision. Learn the rules of the road before you hit the streets, lots and showrooms!
The Car Handbook
While newspaper ads and sticker prices in car windows may give you a rough idea of what a car costs, they don’t tell you the total cost of owning a car. Car costs vary based on the options, the terms of the loan, the mileage (if it’s used or leased), the insurance, driving habits and current market values.
You can figure your own costs of owning your car by filling out the chart below.
|Fixed Expenses||Monthly Cost||Annual Cost|
|Down Payment(First Month Only)|
Figuring It Out
So how do you figure out how much owning a car will cost you? The answer can be found with research and a little guesswork. Fixed costs will be the same regardless of whether you drive just twice a week to pick up groceries or drive an hour to and from work every day. Flexible costs increase with the mileage and wear and tear on your car.
If you take out a loan for a car, you’ll pay a percentage of the car’s cost up front as a down payment. Finance companies usually require a down payment because they like to see you put up some of your own money to demonstrate your commitment to the transaction. A trade-in can also be used as a down payment.
Rebates, sometimes offered to consumers by car manufacturers, can help you make the down payment if you don’t have the cash. Rebates are usually well advertised.
Your Loan Payment
Once you determine the interest rate you’ll pay for a loan, log the monthly loan payment and the total annual payment into the preceding chart. If you plan to finance options or extras such as extended warranties and credit life insurance, add these to the loan payment. (Read about extras in Chapter 5.)
Banks and credit unions frequently offer the lowest rates on loans, but car manufacturers and finance companies offer loans, too. Car dealers may also offer to provide financing. Sometimes you’ll pay car dealers extra interest for this one-stop shopping convenience. Other times dealers may knock down interest rates to pass along savings they’ve received from manufacturers who are trying to push certain makes and models.
You should be able to negotiate the interest rate you get from a dealer. For instance, a dealership may be able to get a loan for you at 6%, but will charge you 8% and keep the extra 2% for itself. You should ask the dealership for the exact rate the bank is willing to make the loan at and compare it to what the dealership wants to charge you. If the rates are significantly different, negotiate the difference.
If you get a loan to finance your car, the seller must provide you a written statement to disclose what the payments would be if certain add-ons are included in the purchase price (and the loan) and what the payments would be without those add-ons. The add-ons that must be disclosed are:
The disclosures must be in a single document in 10 point type, separate from the sales and loan agreement, and must be signed by the purchaser.
How Do You Get a Loan?
Getting a loan is easy if you’ve taken care of your bank or checking account. You don’t need a long credit history. Financial institutions will look at the following items when considering whether or not to grant a loan:
Having all of these is not always necessary, according to bankers.
If you don’t meet the above profile, you still may be able to get a loan. If you have a lot of cash on hand and have found a good deal on a car, you may be able to get a loan for the balance. But if you don’t have much cash and you have a bad habit of bouncing checks or missing other bill payments, you’ll need to discuss with your lender how to clear your record.
Establishing good credit can be as easy as paying your bills on time for six months. Lenders typically want to help you get a loan. Establish a relationship with a loan officer, and tap into his or her expertise.
Be wary of finance companies that offer loans to high-risk individuals who are considered “unbankable.” You’ll pay much higher than average interest rates at these institutions.
The law requires that you be informed if your credit report is obtained in connection with your loan application for a motor vehicle loan. If a credit report is obtained, you must be given a written statement telling you that a credit report was obtained and providing you with information on how to contact the various credit reporting agencies. If you make a request in writing, the dealer shall obtain from the lender the information regarding which credit reporting agencies have been contacted. Once you have that information, you may contact the credit bureau to determine what information is in your credit report. For more information on credit reports, please refer to the Credit Handbook provided by the Minnesota Attorney General's Office.
Length of Loan
Several years ago, loans were usually three years in length. But loans are now typically five years in length to spread out the higher cost of a vehicle over a longer period of time.
If you plan to buy a new car before you pay off your current car loan, you'll end up paying two car loans at once. To keep from incurring high debt, plan to keep a car until you've paid off the loan.
When you take out a loan, the lender owns the car, not you. So if you lose your job, are hurt in an accident or otherwise can’t make your loan payments, you risk having your car “repossessed” — taken back by the finance company. In that case, you won’t recoup a penny of the payments you’ve already made. In addition, you may have to pay a “deficiency judgment” — the difference between what the finance company sells your car for and the loan amount. Because the finance company is only obligated to sell a repossessed car in a “commercially reasonable manner,” it may auction the car off at less than its retail value.
For example, if you have $18,000 left to pay on your car when it’s repossessed, and the finance company sells the car for $16,000, you have to pay the finance company $2,000. The $2,000 is the deficiency judgment. Adding insult to injury, you’ll also have a poor credit rating as a result of not paying your loan, which means you’ll have trouble buying a replacement vehicle.
Creditors who are pursuing repossession do have to follow a few rules. For example, the car may be towed from in front of your house, but the creditor may not break into your garage to get your car. Also, if a creditor loaned you money to buy a car, then the creditor can only repossess the car. The creditor cannot keep other items that might be in the car when it is repossessed.
To avoid the unpleasantness of repossession, call your lender immediately if you don’t think you’ll be able to make a loan payment within the grace period. In many cases, the lender will try to figure out a payment plan that you can stick to. But if you don’t call right away, the lender may be less forgiving.
Loans for used cars are similar to loans for new cars, except that lenders generally finance no more than 80 percent of a used car’s value. This total value is usually based on the “National Automobile Dealers Association’s (NADA) Used Car Guide” or “blue book.” Typically you’ll pay a higher interest rate on a loan for a used car than for a new one.
Once you’ve narrowed down the car models you’re considering, call several insurance agents to ask for insurance price quotes.
Insurance rates always vary based on age, sex, marital status, driving record, where you live, the number of miles you drive to and from work and the number of miles you drive annually, as well as your vehicle, its age and value. In short, if you’re considered low risk, you’ll pay less. If you’re, say, a married couple with a teenage son at home, you’re considered a high risk and will pay more than average.
In Minnesota the minimum insurance you are required to carry includes:
The following are also required by lenders for the duration of a car loan:
Additional Insurance to Consider
Pay for more insurance? Yes. You may want more than the minimum that's required, including:
License Fees and Tax
Call it a relief if you want: Here are two fees that are not negotiable! Motor vehicle sales tax in Minnesota is currently 6.5 percent (although some municipalities and counties may tack on an additional 0.5 to 1.0 percent). And the state has set licensing fees for the type and year of each vehicle. Call Minnesota Drivers License Information, 651-296-6911, to check the licensing fees on a car you’re considering buying.
Fixed costs are the same whether you travel 30 or 3,000 miles a month, but flexible costs are tied directly to your use of the vehicle. These are costs for gasoline, oil changes, car washes, protective maintenance, periodic repairs and depreciation.
The depreciation depends on the value of your car, which is influenced by its age and the number of miles you’ve put on it. You’ll have to guess a bit on this cost. Determining other flexible expenses is easier, especially if you’ve already owned a car. If you’ve never owned a car, information is available at the library or on the Internet. The publishers of “The Complete Car Cost Guide,” now publish directly to their website www.IntelliChoice.com, however earlier versions of "The Complete Car Cost Guide” are available at libraries and bookstores.
Fill 'er Up
To figure how fast you’ll empty your wallet by filling your tank with gasoline, first determine how many miles you drive per month. If you haven’t owned a car, you’ll have to make an educated guess. Then ask a dealer or consult a car book to determine the gas mileage of the car you’re considering buying.
1,000 miles ÷ 30 miles per gallon x $3.00 per gallon of gas. Rounded off, that’s 33 x $3.00, which equals $100.00 per month. (Multiply by 12 for the yearly gas expense. In this example, you would pay $1,200.00 for gasoline for the year.)
Tires, Maintenance and Repairs
Finally, figure in the expenses of buying new tires every few years and paying for general maintenance every year. Maintenance may be as simple and inexpensive as quarterly oil, fluid, and filter changes for the first few years you own a new car. If you plan to buy a used car, you’ll want to set aside more money for maintenance and repairs.
An Appreciation for Depreciation
While not an out-of-pocket cost, depreciation is the biggest expense you’ll have on an automobile, especially a brand-new one. Depreciation makes up more than half the cost of owning and operating a new vehicle.
A new car can lose between several hundred and several thousand dollars in value the minute you drive off the dealer’s lot. About 20 percent of depreciation costs occur within the first year. Even so, you really won’t feel the sting of depreciation unless you decide to sell your car soon after you buy it.
It’s impossible to know exactly how much a car will depreciate because so much of its value is wrapped up in its popularity. But the “blue book” will give you an idea, as long as this isn’t the first year the model has been sold. Look up previous years’ models to see how they’ve held their value.
Countless car-buying guides describe makes and models, covering everything from cylinders to seat comfort. How much do you really need to know about cars before you buy one? You don’t have to be a car genius to buy a car you’ll be happy with. Just do some soul-searching and some simple research first.
Consider Your Needs and Wants
When you start the car selection process, simply knowing that you “kind of like little wagons” or want something with “some zip” is fine. But also ask yourself, “What will I use the car for?” and, “What are my priorities?” A small wagon might be a reliable family car, whereas a two-seat sports car might be the ticket for weekend cruising. Use our checklist on page 70 to review your options.
Whether they’re highly knowledgeable about cars or not, car owners can tell you about the experiences they’ve had with their cars. Quiz them to find out what they like and don’t like about their cars. Listen to their recommendations, but keep in mind that their reasons for liking a car may differ from yours.
Visit the Library
Comparison shop by learning how “the experts” rate cars. “Consumers Digest" and "Consumer Reports" publish annual reports comparing models.
We’d be remiss if we didn’t mention using the Internet for research. If you’re familiar with the workings of the Internet, you may be able to access a website full of information on the vehicle you’re considering. If you don’t have Internet access, see if your library does.
Use your resources to narrow your choices down to three or four models. Different manufacturers design cars that are very similar, so learn which cars or trucks are basically the same. Guides often categorize cars in classes so you can easily comparison shop.
If you’re like most car buyers, you’ll get a loan to pay off a car, so you should determine what you can spare each month.
To figure your car costs, remember that the listed car price is only one slice of the financial pie — and it’s usually negotiable. Insurance, depreciation, license fees, gas and maintenance make up a major part of the cost, but buyers seldom consider them up front. Adding up all these pieces will tell you what you’ll really spend monthly and annually over the life of the car. See Chapter 2 for a review of how to calculate your costs.
Make a Safe Choice
Manufacturers have discovered that a majority of consumers put safety first. Therefore, manufacturers are putting considerable effort into designing cars that can minimize injuries in an accident.
Every year the National Highway Traffic Safety Administration ("NHTSA") issues reports comparing the occupant protection levels of approximately 90 automobiles. The test simulates the impact of two cars meeting head-on at 35 miles per hour. Crash-test dummies in the cars show the injuries people would have received if they’d been in the accident. To get the latest crash test results, call NHTSA’s Vehicle Safety Hotline, 888-327-4236 (TTY: 800-424-9153). If you prefer, check out their website at www.nhtsa.gov. The Insurance Institute for Highway Safety also has a website (www.iihs.org) which contains a lot of information on crash test and survivability ratings.
For optimal safety, cars should not only hold up well in a crash, but should also include safety equipment. Consider ordering the following for your car if the following aren’t already standard equipment:
Once you’ve done some background work, narrow your choices to three or four models you’d like to test drive. And choose a seller as carefully as you choose a car. The next chapter tells you where to start shopping for one.
The Test Drive
You’ve done your research. You’ve narrowed your choices to a few models. Now it’s time to get behind the wheel and take that all-important test drive.
You may wonder, isn’t a test drive like any other type of drive? Not quite. Keep in mind what you want to learn. You’re about to make a major commitment and you want to make sure it’s to the right vehicle. The following should be a part of your test drive: