Budgeting for College: Buying Your First Car

1. Budgeting for College:Buying Your First Car Andrea Morgan, Gary Moore, and Melissa Greenslade Program Coordinators University of ArkansasOffice of Financial Aid

2. Things to Consider… • Finding the Right Car for You • Lifestyle/Budget • Leased/New/Used • Closing the Deal • Paying for It • Loans/Credit • Other Costs • Title/registration; insurance, maintenance, etc. • Anything else?!? • Rules!

3. Finding the Right Car for You • Lifestyle considerations: • Manual or automatic? • Do you need four wheel drive? • What safety features do you want? • Will you be doing any towing? • Will the car fit in your garage or parking space? • How long do you want to keep the car? • How many people do you need to transport? • How much time do you spend in your car? • What type/how much driving do you do most often?

4. Finding the Right Car for You • How much car can you afford? • Know your budget • A good rule of thumb is that your monthly car payment should not exceed 20% of your monthly take home pay • Remember interest costs on car loans • Remember to consider gas costs • Consider the car’s gas mileage and what type of gas it requires • Also budget for insurance, registration, scheduled maintenance, and car repairs

5. Finding the Right Car for You • Research, Research, Research • Know what kind of car you want to buy and what features you want it to have • Go to the dealership BEFORE you are ready to purchase to check out the cars in person • Take a test drive • Resources: • Edmunds.com • KBB.com (Kelly Blue Book) • Consumerreports.org • Carbuyingtips.com

6. Buy or Lease? • Lease: like renting a car, but for a longer time period • At the end of the lease contract, you either have to turn the car in or buy at the price listed in the lease • Leases are generally only for new vehicles • You should consider a lease if you meet all four of the following criteria: • Able to write off your lease payment as a business expense on your tax return • Drive fewer than 15,000 miles per year • Prefer to trade in your car every three or four years • Want to avoid the hassle of selling your used car • Leasing is not a good option if you are thinking about buying the car in the long run

7. Advantages of Leasing • You could get a new car every few years before the car needs significant maintenance and without having to sell a used car • Potential for smaller down payment • Lower monthly payment

8. Disadvantages of Leasing • You pay more if you go over the mileage allotment in the lease agreement • You don’t own the car at the end of the lease • There is a big financial decision at the end of the lease – you must either turn the car in or buy it • If you intend to buy, leasing generally costs more than purchasing from the start

9. New or Used? • May boil down to what you can afford • You could save up to 30-40% on a 3-year-old model • You may owe more than it is worth if you decide to sell a new car you’ve had for only two to four years. • Many manufacturers now offer certified used cars • These cars have passed a detailed inspection and the manufacturer usually adds a warranty (can be 12 months or more)

10. Buying a Used Car • Can be bought from a dealer, private party, or online • Autotrader.com; cars.com; Craigslist; and eBay motors • Research used car prices/values • Edmunds.com • KBB.com (Kelly Blue Book) • Check out the vehicle history • Carfax.com or autocheck.com • Ask for vehicle service records • Thoroughly inspect the car • Have it inspected by a mechanic if possible

11. Warnings about Used Cars • Salvaged Vehicles – vehicles that were involved in an accident or that incurred considerable damage • Lemons – vehicles that have been repaired 4+ times for some defect within a warranty period but is not fixed • Check on your state’s Lemon Laws for new cars to find out what to do if your new car is a lemon • Flipping – buying a vehicle and quickly selling it. There may be a reason the seller is trying to get rid of it quickly

12. Buying a New Car • Research • Find out the Invoice Price • KBB.com; Edmunds.com • This is the dealer’s cost for the vehicle; it does not include any advertising, selling, displaying, or financing costs • Check if there are any rebates or specials deals • Manufacturer’s Suggested Retail Price (MSRP) or “Sticker Price” – the price posted on every new vehicle. • Required by law • Usually the highest market price • Good starting point for getting a fair price is to aim for a target price of 2% over the dealer invoice price

13. Buying a New Car • If you find a car you are interested in purchasing, you have a couple of options: • Bargain remotely (by phone/internet) • Call the Internet Sales Manager or Fleet Manager and tell them you know the invoice price and are looking for the best deal • Once you get a price quote, you can contact another dealership to see if they can beat that price • You can go back and forth on this until you reach a price you decide is fair • Have a copy of the contract faxed to you to review before you agree to it. Look for any hidden add-ons or price increases

14. Buying a New Car • Go directly to the dealership • Know the invoice price and any other special offers available • Stick to discussing the invoice price • Don’t let the salesperson change the subject to the MSRP or monthly payment amount • Negotiate one area at a time – i.e. vehicle price, trade-in value • Know what you can afford and stick to it • Walk away if you feel uncomfortable or too pressured

15. Closing the Deal • Even if you already have financing approved, get the dealership’s best financing offer: it may be better than what you have in hand • Extended warranties • In most cases, you will probably want to pass on this • If you do buy one, make sure you understand what it covers • Other add-ons – pay attention to prices and whether these things are needed • Rustproofing • Security etching • Remember you can still walk away at this point!

16. Bargain Hunter Tips • Buy out of season vehicles • Convertible in winter • Buy a model late in the year before a body style change • Look for an overstocked or mass market vehicle with cash incentives • Buy around the last day of the month (dealers have quotas) • Buy at the end of the year (some dealers will clear out inventory for tax reasons) • Escape the auto debt trap by keeping your car for at least 3 years after you’ve paid it off, then continue to pay your car payment into a savings account. You can use this money plus your trade-in to cut down on the costs of your next car

17. Paying for Your First Car • Consider how much you have or can save for a down payment • Recommended to have 10-20% down • Shop around for financing • Check with local banks and credit unions – they are more likely to give you a better deal on a loan than through the car dealership • Have financing before you go to purchase a car • What to look for in an auto loan: • What is the interest rate? • Your approval and/or interest rate is determined by your credit score • How long would the loan be for? • Remember you cannot sell the car without the lender releasing the title of the car to you and signing off that it no longer has an interest in the car (loan must be paid off)

18. Paying for Your First Car • What lenders look for in a borrower • Credit Application • Amount of Monthly Income/Expenses • Length of Time at Current Address • Length of Time at Current Employer • Car Information/Value • Down payment amount and amount financed • Your Credit Report/Score • How likely you are to repay the loan based on your credit/payment history and current financial responsibilities • Co-signer required? • Remember that the car you buy becomes collateral for the loan. The lender will have title to the car until it is paid off. If you do not pay, the lender has the right to repossess (take the car away from you).

19. Title and Registration • Laws and regulations vary by state • In Arkansas, you must register your car and pay sales tax, registration, and title fees within 30 days of the date of transfer or date from which a prior lien has been released • Manufacturer’s Certificate of Origin if new, or previous owner’s title if used • Invoice or bill of sale reflecting full purchase price • Odometer Statement • Signed copy of lien contract, if financed • Proof of assessment from county assessor • Proof of personal property taxes paid • Proof of liability insurance coverage on vehicle • Payment for sales tax, registration, and title fees • State sales tax is 6%, there may also be local taxes • Title fee of $10.00 • Lien filing fee of $.50 • Registration of $19.75-32.75 depending on vehicle weight

20. Automobile Insurance • Coverage you MUST have: • Bodily Injury Liability – if you cause an accident, this part of your insurance coverage pays for the medical, rehabilitation, and/or funeral costs of your passengers, the other driver and passengers, and any pedestrians involved • Experts recommend coverage of at least $100,000 per person and $300,000 per accident • Property Damage – this pays to repair or replace someone else’s vehicle or property damaged by your car • Recommend coverage of $100,000 • Uninsured and underinsured motorist coverage – this covers medical, rehabilitation, and funeral costs for you and your passengers if the accident is caused by someone who has little or no insurance

21. Automobile Insurance • Coverage You Probably Need: • Collision – pays to repair or replace your car no matter who caused the accident • Comprehensive – pays to repair or replace your car if its stolen or damaged as a result of a natural event • Coverage for these items kicks in for amounts above your deductible • Choose the highest deductible you can afford to pay out of pocket to help lower your insurance costs • Personal Injury Protection – reimburses you for lost wages and home care needed as a result of an accident • Medical Payments – pays you and your passengers for medical and funeral costs regardless of fault. It will cover injuries you incur while operating someone else’s car and injuries you and your family incur as pedestrians

22. Automobile Insurance • Other coverage available • Roadside assistance – pays to have your vehicle towed • Rental reimbursement – pays for a rental car for up to 30 days if your vehicle is stolen or wrecked • Be sure to shop around for the best rates • Remember this monthly cost when determining your available budget for purchasing a car

23. Automobile Insurance Costs • Based on risk factors (rate the likelihood that you will get in an accident or file a claim) • Age; gender; zip code; model, year, average repair cost, crash safety rating of primary car… • Ask about discounts (taking a driver safety course, combination auto/home policy, full-time student, maintaining good grades…) • No tickets or accidents for 3 years=good-driver discount • Note: It is generally less expensive to be included on your parents’ family policy unless you start having problems with accidents or tickets.

24. Real-World Example: 2012 Honda Civic Coupe • MSRP: $16,405 • Invoice price: $15,122 • 2% of invoice: $302 • Total paid for car: $15,424 • $1542 down (10%) • Loan: 60 months at 5.24% compound interest ($1928 total interest cost) • Monthly payment: $263.50 • 6% sales tax: $925 • Title, lien fee, & registration: $30.25 • Insurance costs (based on median rates in 2011): • Drivers 20-24: $77/mo • Drivers 25-29: $58/mo • Upfront cost: $2,476.25 (down payment, sales tax, title, lien fee, & registration) • Monthly cost: $341 (car payment & insurance—excludes gas and maintenance) Calculators available at www.edmunds.com, www.kbb.com, etc.

25. Car Maintenance Keeping your car regularly maintained can help prevent bigger problems and bigger costs down the road • Three things YOU can do: • Check the engine oil - monthly • Check the tire air pressure – monthly and before any extended road trips • Regularly wash your car • Have your oil changed regularly • Every 3000-7500 miles or every 3-6 months (check your manual for your cars recommendations) • At the same time, check your air filter, exhaust system, brakes, and fluids, clean the radiator, and check the battery • Every 2-4 years • Drain and flush the cooling system • Change the automatic transmission fluid • Replace the drive belts and hoses • Change the timing belt

26. Car Maintenance Costs • Budget a little every month for car maintenance • And budget for car repairs • Automotive Budget Busters: • Tires • Heating/Air Conditioning • Transmission • Clutch • Brakes • Starter • Battery • Head Gasket • Cracked Windshield

27. Car Rules…Inside and Out • Know, understand, and plan to follow the rules of the road • Ignore the rules and get caught: • Pay a fine to the court • Pay for traffic school, if eligible • Pay more for car insurance • Driving privileges may be suspended • Driving privileges may be revoked • Car insurance may be cancelled and available only through a high-risk, high-cost insurance carrier • Adopt a set of rules for your car and make sure people know BEFORE you NEED to enforce them!

28. Before you go… • Please complete and submit your evaluation forms • PowerPoint presentation will be posted on our website, with past presentations • Budgeting/Money Wisdom • Scholarships • Credit Cards & Credit Reports • Identity Theft • Banking & Money Management

29. Thank You! • Contact Information: • Office of Financial Aid; Andrea, Gary, and Melissa • Campus location: 114 Silas Hunt Hall • Phone: 479-575-3806 • Fax: 479-575-7790 • Website: http://finaid.uark.edu/ • And find us on Facebook at University of Arkansas Financial Aid!