Summer is a time for car deals, but are they worth it?
If you watch TV or listen to the radio, or even browse the internet, at this time of year, you know it's a big business season for car dealers. Summer marks the end of the model year, which means that new models, next year's models, are coming to dealers soon. Some dealers might already have 2014's models in stock. Of course, in order to effectively sell these new models, dealers have to unload the bulk of last year's models. Manufacturers aid this by offering many incentives that dealers can pass along to consumers, which is why we see so many big car deals in the summer months.
New car shoppers might find this to be a boon. They can get a car for thousands off instantly, or get a greatly favorable financing rate. That might sound like a good reason to go out and buy a car now, rather than waiting or buying a new model year car. Of course, that's what the dealers want you to think -- they're incentivized to make that sound like a great deal. But there are many reasons that the summer deals don't always work out in the consumer's favor.
Overall car value
As the saying goes, a car loses value the minute you drive it off the lot. That is true for any kind of automobile purchase, though to varying degrees. When you drive a brand new, model year car off the lot, it loses relatively little value. You could sell it for something close to what you paid for it. That changes when you drive the previous model year off the lot. It is immediately worth much less than what you paid for it.
The previous model year is still based off the same MSRP and invoice pricing as it was a year prior. That is, if you buy a 2013 model today, it's the same base prices as it was 12 months ago. Yet when you drive it off the lot, it is worth only as much as a 2013 model. That is, it's worth significantly less than what you paid for it. Car dealers try to play up this difference by offering what is termed GAP insurance. Of course, the "gap" closes quickly, meaning GAP insurance is only valuable for a year or so. So you have a choice: risk having your car totaled within the first year and having it be worth far less than what you paid for it, or pony up for GAP insurance.
Rebates are misleading
One promotion car dealers love to run at this time of year involves rebates -- or factory-to-dealer incentives, as they were called years ago. The promotion is extremely enticing: buy this car now, and instantly get X hundred or Y thousand dollars back, instantly. What that means is that the manufacturer has offered the dealer a rebate when it sells a certain car. Those savings, however, do not necessarily revert to the consumer.
When dealers present consumers with the value of new cars, they present both the MSRP -- the manufacturer's suggested retail price -- and the invoice price, which is what the dealer pays for the car. What the dealer likely won't tell you is that the rebate comes off the invoice price. So if the manufacturer is offering the dealer $2,000 in rebates off a car with an invoice price of $23,000, that means the dealer really only pays $21,000 for the car. Meanwhile, the MSRP might be $25,000. If you negotiate off the MSRP, you'll pay maybe $22,500 and think you got a deal. But in that case the dealer pocketed $1,500 that you could have if you knew the game.
Beware 0% APR
Most consumers jump at the chance at zero percent financing, especially on long-term, high-cost items. In the case of new cars, zero percent APR can essentially mean paying cash, but spread out over five years. That gives the consumer a great advantage due to the time value of money. Yet there are many pitfalls that come along with zero percent APR offers. The first and foremost is that many people will not qualify. At the same time, the dealer might not make that clear. Do not sign any finance paperwork unless you know precisely how much you're paying in interest.
The second is that the terms of the zero percent financing are very strict. It is commonplace that if you miss even one payment, even making that paying a single day late, you loser the zero percent rate. Better watch out there, too, because in some instances you'll not only lose the rate, but have to pay back interest on all previous payments. That would constitute a huge, unexpected burden for most consumers. So before you sign that paperwork, inspect it throughly.