Ask the Hammer: Three Tips on Buying a Used Car
Robert Powell, CFP®
What should you consider when buying a used car?
That's the question a young reader recently posed Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners.
Here are the key considerations:
1) Have a mechanic you know and trust evaluate the car you plan to purchase. "The peace of mind and the confidence of knowing that the car has been checked out by someone that you trust independent of the used car lot is also highly effective," says Levine.
3) Figure out your best source of financing, and let the dealer know that you've secured outside financing from, say, a bank or credit union already. "It can be a good move," says Levine. "It doesn't mean that you're not willing to look at (the car dealer's) financing but it means that one of their negotiating tactics, perhaps is kind of removed."
Levine also discussed what percent of income the car payment should be.
"People say 10% and 8%," he said. "To me, it's a good starting point but it also depends upon other things... I'm not a believer that you have to stick to these old rudimentary rules of thumb, like 26% for the front end ratio... It's really about looking at the big picture, figuring out what are your priorities and then how do you actually pay for them?"
As for using a 60-month loan, Levine said it comes down to the delta, or the difference between the short-term loan and the longer-term loan, "If it's going to cost you, let's say a quarter of a percent more to extend that loan from three years to six years, you might consider doing it," he said.
But you also have factor in how long you will have the car. The last thing you want to do, he said, is be on the hook for two years worth of payments after the car is gone and you have to buy or lease another car. "So looking at these things in their totality can be helpful," Levine said.