5 Big Car Buying Mistakes

Last Saturday I was out to dinner at one of those Japanese Hibachi places. Over a scorpion bowl, I was talking to a friend who works as a sales manager at a luxury car dealership. He was mulling over getting out of the industry because—as you might imagine—car shoppers aren’t the nicest people to deal with every day.
“Customers logon to Kelly Blue Book once and think they know everything about the car business,” he said. “The minute they walk in the door they hate us just because we’re trying to make a profit.”
Regardless of how ruthlessly you’ve ever negotiated with a car dealership, you have to admit it’s odd that we’re so loathe to pay car dealerships a profit. After all, we will happily pay a department store a markup on clothes and realtors a commission when we buy a home.
Yet last week, I asked my focus group about their experiences buying cars, including their biggest fears when they think about the process. Out of 50+ responses, the majority shared a singular theme. Here’s a sample:

• “Getting ripped off on price.”
• “Overpaying because I am a woman and the salesman would take advantage of that. I am not good at negotiating.”
• “I didn’t want to get screwed over on the price.”
• “Getting screwed.”
• “Getting ripped off.”
• “Getting ripped off by a salesman. Paying too much.”
• “That the salesman would try to intimidate me into paying too much or push me into something I didn’t want.”

This isn’t just what my friend is up against; it’s how we all set out to buy a car…with our guard up and feathers out. And because of that, we frequently make several mistakes in the car buying process. 
1. We overfocus on price.
Look at the words people used when talking about their fears of car buying. Not only do they mention “getting ripped off”, the say “getting ripped off on price” and “paying too much” for the car.
The price we pay for a car is one element of the transaction of buying a new car, and arguably the largest. When we buy a car, we ask ourselves: Did I get a good deal? (for the specific year, make and model we purchased). In other words, we want to know if we paid more or less than the average person for that particular car. Among identically-equipped new cars, it’s possible to find this out, and indeed sites like Edmund’s try. Of course, due to mileage and condition factors, no two used cars are identical, so this is a much harder game.
More important than price is whether you’re getting the right car for your needs and not buying more car than you can afford. (So if you have to finance the car, should you be going for the leather?)
Or, should you consider a recent-year used car instead of a brand new model? It will likely save you far more than you can haggle off a new car sticker price. If you “have to have” a new car, I get it; go for it. But if you’re on the fence, remember: Everybody drives a used car!
2. We ignore financing terms.
This makes no sense: Fighting tooth and nail with a car salesman for three hours to get an extra $500 off the price, and then financing the car with no money down at 6.0% for four years at a cost of over $2,000.
But we do this all the time because in our heads, the $500 we saved now on the sticker price is tangible while the $2,000 we’re paying to finance the car isn’t. When I asked my focus group about any regrets they had about their last car buying experience, there was another common thread—the loans!

• “We should’ve put more of a down payment.”
• “The loan.”
• “I didn’t shop around for my loan rate.”
• “My only major regret is that I let them sucker me with an 11% interest rate out of the gate…”

The wrong loan can quickly cost more than savings you’ll get negotiating on price. Here’s an example:
Looking at Edmunds.com pricing on a 2012 Honda Civic LX Sedan, the difference in MSRP ($17,855) and Dealer Invoice ($16,452 — what the dealership pays for the car) is $1,402. Nothing to scoff at, and a smart buyer will attempt to dicker the dealer down from the MSRP or up from the invoice.
But if the buyer then finances the car for 48 months at 6.0%, he’ll pay $2,094 in total interest over the four years. I suspect fewer buyers negotiate interest rates, but if this buyer could get a loan at 4% instead of 6%, he’d save $716 in interest. And if he could pay off the car at 4.0% in three years instead of four, he’d save another $344. Adding a $1,500 down payment would drop the total interest to $934—a savings of over $1,000 off the original financing quote.
Unless you’re looking at 0% or other low incentivized interest rates, it’s best to buy a car with cash. If you have to borrow, my advice is this: Do so conservatively. Obviously get the best rate you can. Stick with loans no longer than 36 months. And try to put 20% down.
3. We don’t value our time.
The average American spends 10 hours shopping for a car, compared to only five hours shopping for a home loan. Some shoppers become so obsessed with getting the “best deal” that they’re willing to spend weeks car shopping. But at what price?
Although everybody values time differently, let’s say a free hour is worth $15 to you (if you earn a lot, it could obviously be much more).
Spend 10 hours buying a car and you’ve invested $150 worth of your time.
Spend double that and you’ve invested $300.
The more you value your time, the more the cost of additional hours spent car shopping, and the bigger a chunk that takes out of your potential savings.
4. We underestimate total cost of ownership.
When you decide to buy a new car, your Emotional Brain is already sold—it can picture itself behind the wheel and it loves it!
Your Practical Brain, however, is like: “Whoa, not so fast! Is this a good deal? Is it reliable? What’s the mileage? What’s the resale value?”
And then you try to calculate those things to justify the purchase. You may, for example, tell yourself you’ll keep the car for 10 years to justify the depreciation.
But that estimate (and similar estimates of the car’s future value) may be overly optimistic thanks to something psychologists call the optimism bias. Everybody who marries thinks they’ll stay married forever even though sociologists predict that between 40 and 50 percent of marriages will end in divorce.
And according to the USDOT’s 2009 National Highway Travel Study, the average length of car ownership is 59 months—just shy of five years. So just remember that the next time you think you’ll keep your next one for 10.
You may also overestimate the gas you’ll save and underestimate ongoing costs like maintenance, insurance, and excise taxes. Consumer Reports attempts to put some numbers on true cost of vehicle ownership. Accurate or not, you can at least see how different models compare.
5. We set our expectations too high.
Psychologist Barry Schwartz shows that the abundance of choice we have in affluent society wrecks havoc on our happiness. With so many choices, we feel constant pressure to choose perfectly, making us anxious about the choice and depressed when we choose poorly.
If the product we choose doesn’t live up to our expectations, we’re disappointed. We’re rarely, if ever, pleasantly surprised. Schwartz jokes that the secret to happiness is lowering our expectations. Only it’s not entirely a joke.
This rings true for car buying.
Given cars’ high price tags, the infrequency in which we buy them, and the adversarial nature of the buying process, we stress out about getting the perfect car at the perfect price. Then, regardless of how well we do, we drive off the lot with this lingering suspicion we’ve been screwed.
If you do your homework, open your eyes to the true costs of owning a car, and avoid making expensive mistakes (like ignoring the financing terms), you can get a good car at a good price. And that’s the goal.
Recap
Buying a car doesn’t have to be a miserable experience. Spend most of your time choosing a car that you can afford, meets your needs, and you will be happy to drive. Yes, get online pricing and competing dealer quotes from a site like Edmund’s, but don’t kill yourself fighting with the dealership unless you like that sort of thing. And borrow smartly: Get the best interest rate you can and put money down.
Soon I’ll post more about auto financing (when to do it, how to get the best deal, how to refinance a bad loan, etc.) I’m also working on a post on negotiating skills (even for shy people). I’m shy and it has taken practice to be able to negotiate at all. I’ve had some successes, which I’ll share in the post, but still have some work to do, so I’ll show you what I’m doing and how you can practice negotiating (for a new car, for a raise, for anything).