Save on Your Next Car

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Dear Dollar Stretcher,
What suggestions would you give to a teenager who is looking to buy his or her own car?
Jeff S.

Jeff asks a good question. And he's not alone. Beginning in the early 90's, each year saw more 16-, 17- and 18 year-olds coming of age than at any time in the previous 20 years. Most of them will get a driver's license and many will own cars before their 20th birthdays. The tricks of finding car value are the same for any age buyer.

Let's begin with the obvious. Which car you pick will make a difference in the costs of ownership. Take three possible choices for our teen friend ­ the Honda Accord, Honda Civic and Chevrolet Camaro.

The Camaro is certainly the flashiest car. And probably our teenager's first choice. But style comes at a cost. The MSRP of a 2000 Camaro in its basic configuration will run $16,940. Naturally you'll negotiate down a bit, but for simplicity let's just compare MSRP's.

More practical is the Honda Accord. A 4-door DX model lists at $15,350. So that's about $1,600 of savings to start. Better still would be the Honda Civic at $12,885. You'd save $4,000 compared to the Camaro.

But, that's only part of the story. The savings gap will widen when you begin to include operating expenses. Consider gas mileage. We assumed that our teen drives the national average of 13,000 miles a year and gas costs $1.50 per gallon. We're not predicting gas prices here, just illustrating a point. The Camaro will go through $812 each year in gas. The Accord drinks up $735, while the Civic sips a miserly $619. So the Civic would save nearly an additional $200 per year at the pump.

Then there's insurance. To compare rates on different cars you really need to talk to your insurance agent. The age of the driver, gender and driving record will all play parts in the cost of insurance. The type of car being insured counts, too. But, clearly the faster and sportier a car is, the higher the rates will be.

OK, that's the picture on a new car. But who says that our teen driver needs new wheels? There's significant savings to be found in used cars. Unless you have money to burn, a used car makes much more sense.

Using figures provided by the Edmunds.com website, we looked at the cost of a new Civic and similar used ones. What we found is not surprising. A new Civic (4-door DX sedan) has an MSRP of $12,885 plus a $415 destination charge. A used '99 Civic retails at $10,850. That means that a new Civic will lose approximately $2,400 in value or 18% in the first year.

What happens the second year? A 1998 model retails for $10,140 or a mere $700 less than the '99.

The loss is the same third year is similar. About $760 less than the two-year-old car. And the trend continues. Each year a Civic is worth about $750 to $800 less than the year before.

Frankly, you can buy a one-year old car and avoid the $2,400 first year depreciation. You get three years in a used car for the cost of the first year in a new car. That's a lot of money to pay for that new car smell. By the way, that new car smell is actually the odor from the glues that they use to assemble the car.

Many buyers justify a new car because they don't want to face major repair bills. And while that sounds like a valid reason, it usually just hides the fact that they want a new car. If it's really a financial issue there are two ways to handle it.

You could buy an extended warranty. We quickly found one for the '97 Civic that would provide 3 years or 36,000 miles of bumper-to-bumper coverage with a $50 deductible for $950. Or you could set aside some of that money you saved in first-year depreciation for a potential major repair.

One final thought on selecting a car. Remember that this is a "starter car." That means that it probably doesn't have to do everything. The goal is transportation for your teen. Even if they'll be going to school across the country, that doesn't justify buying a car the size of a moving van.

Look for a simple car. Every car doesn't need to have power windows, power door locks, and power seats. Your teenager will not get worn out cranking down a window or reaching over to unlock the passenger-side door. Those things are nice, but they drive up the cost of the car. And as the car gets older those are the kinds of things that tend to need repair.

The next question our teen faces is how to pay for the car. Obviously the best financial choice would be to limit your choice to the amount of cash available. I know that's not popular. But it is possible to save $3,000 working during the summer. And you can find good transportation for $3,000.

Financing adds a lot to the cost of a car. Take the '97 Civic that we talked about earlier. It would cost $9,380 on a cash transaction. But if you came in with $1,000 down and financed the balance you'd end up with 36 monthly payments of $264. That means that the car would actually cost you $10,495.

If you must finance, expect that Mom or Dad will have to take out the loan. Even if you can find a willing lender for your teen, the rates will be higher. One possible exception: occasionally some manufacturers will have a special offer for firs- time buyers. Ask around to see what's available.

One final thought. It's natural for young people to be in a hurry. Buying a first car is a great learning opportunity. Take the time to teach them how to comparison shop, make a wise decision and then negotiate a good deal on that set of wheels. As an old gasoline ad used to say - Happy Motoring!

Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. You can also follow Gary on Twitter or on his blog.

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