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An Economist Approach to Car Shopping

ted car 2Like for most Americans, buying a car has always been a stressful but necessary personal finance decision for me. This time around, now with the backing of an education and work experience in economics, I was able to take a more methodical, informed approach to one of life’s bigger expenditures

First I needed to figure out the basics. I decided on a new car because I drive almost 25,000 miles a year commuting to work, so I couldn’t be starting with a car that already had miles on it. Running up the mileage causes rapid depreciation, so I needed to find a car that holds its value. Driving that much also meant I needed a ride with good gas mileage.

The other top priority was style and handling. I consulted Kelley Blue Book and Consumer Reports and narrowed the decision down to a Honda Civic and a diesel engine Volkswagen Jetta. I opted for a manual transmission because it’s more fun and was almost $1,000 cheaper than the automatic transmission.

The next step was creating a financial plan. I immediately ruled out leasing because of my high annual mileage; most leases have an annual mileage limit of only 12,000. I had to figure out financing. This required I determine the value of my trade-in, the down payment, and monthly payment. As for the trade-in, I inherited a financed Nissan and had built substantial equity in the car. I used Kelley Blue Book again to determine the value of my trade-in. I shopped around and made dealers compete for my trade-in.

The process of saving for a down payment involved creating a medium-term plan. I created a monthly budget and savings plan for my down payment using AIER’s budget book. Knowing my budget also helped me know the monthly payment I could afford. Every choice involves a trade-off; I did not want a high monthly car payment and have to give up other things.

The last piece of the financial puzzle was financing. I needed to know what interest rates were, so I consulted AIER’s Business Conditions Monthly. The other important piece was obtaining my credit report. AIER intern Joshua Ibanez pointed out earlier this summer that you can get three free credit reports a year, one from each of the three national bureaus: Equifax, Experian, and Transunion, by visiting www.annualcreditreport.com.

Before going to the dealership I took a step back and looked at the big picture. In economics everything is a market with supply, demand, and price. Dealerships are facing strong demand while supply isn’t an issue, but competition is still tough. Dealerships have thin profit margins and need to move volume to pad their bottom line. So I knew that I could wait for a sales event or manufacturer incentive.

I showed up at a Honda sales event ready to implement my plan, not the salesman’s plan for me. I kept negotiations short because I knew what I could afford and what I wanted. I drove a 2015 Civic off the lot and been nothing but happy with gas mileage, handling, and style.

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