Minnesota Attorney General's Office
1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101
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Chapter 1: Driven to Buy a Car?
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 the average cost of a car is about $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 many other purchases.
There is no three-day right to cancel ...
Once you sign on the dotted line, the car is yours. The Attorney General’s Office hears from many consumers every Monday morning who assume they can still return the car they bought Friday night. They can’t. But they learn this lesson the hard away. So, don’t be one of our remorseful Monday morning callers —remember, when you buy a car it’s yours!
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? Did you have to have a talking car, the phenom of the early 1980s? 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. Jack Gillis, author of “The Used Car Book,” writes that used cars cost an average of $8,000 less than new cars. Even with the cost of repairs, used cars cost less to drive. Gillis estimates that you can save about 15 cents a mile driving a used car after the first year. With savings like these, 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 warrantied 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! But 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 the chapter “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!
Chapter 2: What Can I Afford?
The Car Handbook
What Can I Afford?
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.
The Money Management Institute in Illinois attempts to figure the average cost for owning a car. In its booklet “The Automobile Dollar,” it calculates the total “fixed” costs (insurance, license fees, registration and taxes) plus the total “flexible” expenses (gas, oil, tires and maintenance) to be $172.75 per month or $2,073 annually, which is just under 14 cents a mile if you drove a 1990 car for 15,000 miles for each of four years. This monthly charge is in addition to any loan payment you've agreed to.
The cost is based on owning a “composite” vehicle — this is an average determined by combining the characteristics of all the vehicles the institute looked at. The result may be like merging an elephant, a woodchuck and a shrew to come up with a “composite animal.” Your best bet for judging car costs is to list your own costs, as follows:
- Downpayment (first month only)
- Loan payment
- License fees
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 will take out a loan for a car, you'll pay a percentage of the car's cost up front as a downpayment. Finance companies usually require a downpayment because they like to see you put up some of your own money to demonstrate your commitment to the transaction.Rebates, sometimes offered to consumers by car manufacturers, can help you make the downpayment 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 electric windows, extra speakers, 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 have your loan payments automatically deducted from your bank or checking account, you may be able to get a discounted interest rate. The automatic deduction cuts down on the lender's administration, so your lender may be willing to give you a break.
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:
- A pattern of meeting financial obligations,
- More than one year at the same job, and
- No more than half of your gross income committed for fixed expenses such as rent, loans and credit cards.
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.
Questions to Ask About Your Loan
- What's the percentage rate I'm paying?
Always look at the annual percentage rate. It may differ from the face rate of the note if you are buying and financing extras.
- What's the grace period for my monthly payment?
- Is there a late charge after 10 days? 30 days?
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.
A Loan Turns You Upside Down
When you finance a new car or truck, you’ll most likely be “upside down” for much of your typical five-year loan. That means a few years down the line you will probably owe more for the car than the car is worth. This is due to depreciation.
Knowing that you won’t really own your new car until it’s very used is an uncomfortable realization for some people. It’s also one reason to consider buying a used car. Leasing is another option for those who don’t care if they ever own a car and would rather drive a newer car all the time.
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 judgement. 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.
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.
Repossession Can Happen Quickly
Finance companies normally aren't obligated to send letters warning you that your car may be repossessed. While they usually write first to inform you of a delinquent loan, they may have a right to repossess your car if your payment is even one day late following the grace period.
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 based on the "National Automobile Dealers Association's (NADA) Used Car Guide" or "blue book." And 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 and 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:
- $30,000 per person and $60,000 per accident for bodily injury
This covers claims against you in addition to your legal defense if your car injures or kills someone.
- $10,000 property damage liability
This amount is paid for claims and defense costs if your car damages another person's property.
- $40,000 for personal injury protection
This covers your medical costs if you are in an accident.
- $25,000 per person and $50,000 per accident for uninsured/underinsured coverage This pays the medical expenses of those in your vehicle in the event they are injured by an uninsured or underinsured motorist.
- The following are also required by lenders for the duration of a car loan:
- Collision insurance
This pays for damage if your car is in an accident.
- Comprehensive physical damage insurance
This covers damage if your vehicle is stolen or damaged by fire, flood or another disaster.
- Collision insurance
Added Insurance to Consider
Pay for more insurance? Yes. You may want more than the minimum that's required, including:
- Medical payments insurance This pays for medical expenses of the driver and passengers in your car who are injured in an accident.
If your car stalls or is in an accident, towing is covered.
- Car rental insurance
When your car is being repaired, you can collect insurance to pay for a rental car.
License Fees and Tax
Call it a relief if you want: Here are two fees that are not negotiable! Sales tax in Minnesota is currently 6.5 percent (although some municipalities tack on an additional .5 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 license 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, however, consult a book like "The Complete Car Cost Guide," published by The Intelligent Choice Information Company in San Jose, Calif., for guidelines.
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 $1.30 per gallon of gas. Rounded off, that's 33 x $1.30, which equals $42.90 per month. (Multiply by 12 for the yearly gas expense. In this example, you would pay $514.80 for gasoline for the year.)
Eight Ways to Lower Your Insurance Costs
The Insurance Information Institute in New York offers the following tips to reduce your insurance payments:
- Comparison shop.
Shop for both fair prices and excellent service. Narrow the field by asking friends and relatives about their rates and checking the survey in the back of this guide for an estimate of rates.
- Ask for higher deductibles.
Deductibles are the amount you pay out of pocket before your insurance company covers a claim. By increasing your deductible from $200 to $500, you could reduce your collision costs by 15 percent to 30 percent.
- Drop collision and/or comprehensive coverage on older cars.
For cars worth less than $1,000, it may not be worthwhile to carry collision or comprehensive coverage. Your deductible may be equal to or more than the amount you pay for this coverage.
- Eliminate duplicate medical coverage.
If you have health insurance already, you may be duplicating your coverage by paying for medical coverage on your auto policy.
- Buy a low-profile car.
Cars with high incidences of collision or theft, or those that are associated with a high rate of injury, may cost more to insure than those considered safer or less sought after by thieves. The Insurance Institute for Highway Safety can send you a report comparing more than 100 cars' rates of collision, injury and theft. To order a report, mail a self-addressed, stamped business-sized envelope to: HLDI, P.O. Box 1420, Arlington, VA 22210, and request the "Highway Loss Data Chart."
- Take advantage of low-mileage discounts.
Some insurers offer discounts to motorists who drive less than a predetermined number of miles per year.
- Find out about automatic seat belt or air-bag discounts.
You may receive a discount for having these safety devices.
- Ask about other discounts.
Other possible discounts may be given for owning more than one car, having no accidents in three years, being more than 50 years old, taking driver training courses, installing anti-theft devices, having anti-lock brakes, being a nonsmoker and even being a good student.
From the Insurance Information Institute, New York, NY. For more information call 1-800-942-4242.
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.
Tips for Better Resale Value:
- Avoid offbeat or less well-known makes and models. Remember the Pacer? The Gremlin? The Fiero? Where-oh-where are these today? Select a popular, highly regarded model or a car from a respected auto maker that will virtually be guaranteed to be well-regarded years down the road.
- Choose a car from an auto maker that doesn't change its body style every year or so. If you're bent on buying a fashion-forward style, buy it soon after it's first marketed.
- Even in Minnesota, a good air conditioner is a must for raising resale value. A high-quality sound system also heightens the value.
Chapter 3: Hit the Books Before the Accelerator?
The Car Handbook
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 69 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. "Consumer's Digest Annual Car and Truck Buying Guide" compares models and offers recommendations. The "Consumer Reports Annual Buying Guide," which comes out every April, is also helpful. Other books, such as Jack Gillis' "New Car Book" and his "Used Car Book," talk about cars in plain English.
We'd be remiss if we didn't mention using the Internet for research. If you're familiar with the workings of the World Wide Web, you may be able to access a Web page 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 Auto Safety Hotline, 1-800-424-9393. If you prefer, check out their Web site at: http://www.dot.gov/affairs/index.htm.
Don't Hurry Love
The best way to avoid problems after you buy a car is to know what you need before you buy it and not get swept away by love. Here's what happened to a poor fellow who fell for a car and made a commitment too soon.
The man was enamored with a little foreign sports car offering a fast ride and some sex appeal. He put down his money and made a long-term financial promise. This man lived in the North Woods 100 miles from the nearest foreign car dealer. He had failed to realize that every time his fast and temperamental phenom broke down, he'd have to have it towed 100 miles!
Frustrated and fed up, he wanted to return the car, but it was too late. He'd signed the contract to purchase the car and had to live up to his agreement, for better or worse.
Go into car-buying with your eyes open. Before you buy a car, know what car you want.
Know its value. Know if you can afford it. Don't let love turn your head and empty your
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:
- Air bags for the driver and front passenger seats
Air bags are designed to protect front-seat passengers in 30-mph frontal collisions. They've considerably reduced average injury severity in frontal crashes. A word of caution, however: Wear your seat belt even if you have air bags. Air bags are not meant to replace seat-belts; instead, they enhance their effectiveness. Also, according to the National Highway Safety Administration, children under age 12 should not sit in the front seat if the car is equipped with air bags. And rear-facing car seats carrying infants should never be used in the front seat. For more about air bags, see Page 23.
- Lap belts in front and back seats
While some people believe it's better to be thrown free from the car in an accident and therefore don't wear their safety belts, the chances of being killed are 25 times greater if you're ejected from the car. About 60 percent of the deaths and injuries in car crashes could have been avoided if the occupants had been wearing safety belts. So buckle up!
- Shoulder belts
Your shoulder belt helps your lap belt hold you steady during a crash. But avoid shoulder belts mounted on the door they won't keep you from flying out if the car door opens during a crash.
- Anti-lock brake systems (ABS)
Anti-lock brakes automatically pump the brakes for you when you slam your foot on them in an emergency. They may help you avoid an accident by slowing or stopping your skid while you try to turn. The down side is that if you try to pump the brakes and end up taking your foot off the brake pedal, the anti-lock feature won't work as it's designed to. You must constantly hold your foot on the brake. Learn to use anti-lock brakes properly if your car has them.
Is Your Car Giving You the Shakes?
If you suspect your car has a problem beyond normal wear and tear, call the NHTSA Auto Safety Hotline. The Auto Safety Hotline phone numbers are 1-800-424-9393 and TTY: 1-800-424-9153. (Or visit the NHTSA World Wide Web site at: http://www.nhtsa.gov.) NHTSA can tell you if the model has a manufacturing defect. NHTSA tracks the following:
Recall information. NHTSA will let you know if your car was recalled for a defect. When you buy a new or used car, the dealer should check to see if there's been a recall. Also, remind mechanics to check for recalls whenever they service your car.
- Early warnings on potential defects. Since all reported defects are reviewed by NHTSA, you can find out if NHTSA is investigating a problem with your model of car. If not, your reporting of a defect may open an investigation that could lead to a recall.
- Crash test information. Find out how vehicles fare in annual crash tests.
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:
- Take the car on the road for at least a half hour.
- Drive in city and freeway traffic. See how the car starts, stops, shifts (if it has a manual transmission), speeds up on the freeway and takes corners.
- Ask yourself how comfortable you feel in the driver's seat.
- Let a friend drive so you can see how the car feels from the passenger's seat. Try out the back seat, too, if you're buying a sedan or van.
- If it's winter, great! Find out how the car handles on snow and ice.
- Don't go easy on the car. Drive like you really plan to drive.
Child Safety Seats
Automobile accidents are the leading cause of death or serious injury for children, yet nearly 80 percent of children who die in vehicle crashes could have been saved by proper use of child safety seats or safety belts.
In Minnesota, children ages 4 and under must ride in federally approved safety seats, as identified on the seat. Infants under 20 pounds must ride in rear-facing safety seats, which must be secured with a seat belt, assuming that the car was originally equipped with seat belts. The fine for failing to properly restrain children is $50.
When purchasing a child safely seat consider the following:
- Find out if it's been recalled for defects. Call the NHTSA Auto Safety Hotline. This is especially important when you buy a used car seat.
- Make sure the seat can be properly installed in your vehicle.
- For convenience, select a seat that requires fastening only one strap.
- Make sure a child can move his or her limbs freely, even in bulky winter clothing. A child should be able to sleep in the seat and, if older, see out the window.
- If the seat has been in a crash, don't use it. Replace it immediately.