Price Puzzle Solved

• Where is the car being sold from? Shipping fees will vary based on transport distance, and so can’t be fit on the price tag automatically. Online purchases make the idea of ordering a car from anywhere seem easy, but it can still be costly!
• Who’s inspecting the car? In the case of private sellers, someone needs to verify that it’s in good condition before it is shipped to you, especially if it’s a used vehicle. Inspection services aren’t free. For formal dealerships, you’ll usually be charged significant documentation fees, and these won’t always be included in the tag price.
• What’s the warranty? Online deals won’t always have a warranty baked in. In these cases, you’d have to purchase your own as an extra cost.
• What are the site’s transaction fees? Online transactions cost money, and that cost is often forwarded to the consumer.

This is, of course, on top of more traditional “hidden” costs like registration, maintenance, loan interest, fuel, insurance, vendor admin fees, and any relevant taxes/ government fees.

Note that there are some silver linings to the above: online purchases generally give you more freedom in the insurance you purchase, allowing you to go for a more reasonable option. Traditional purchases tend to saddle you with either the bank’s or the dealer’s preferred insurance providers, neither of which may be best for you. What to Do With the above in mind, how can we make wiser purchases? What can we do to make these extra costs more bearable?

• Use the tools you have! One of the biggest advantages of online shopping is that it’s easier to compare prices from multiple sellers.
• Don’t just compare the price tag and transaction fees: wherever possible, also check if the warranty or inspection is included.
• In the case of an included inspection, also check who’s doing the inspection: they need to be unbiased!

It’s also good to have some solid financial boundaries in mind. The simplest one is “if you cannot purchase it twice, you cannot afford it” but, like all simple rules, it can lack practical nuance.

Good financial advice from Steve Burns suggests that no more than 25% of your gross annual income (maximum) should be spent on purchasing your car. For people who prioritize buying their next car above all else, and don’t mind potentially delaying or even neglecting other financial goals, that number raises to 35% — about four months’ wages.

These rules hold up well regardless of how you’re financing your purchase. Speaking of which:

• Cash purchases mean you won’t be paying interest on a depreciating asset. It also ties up a lot of money NOW in exchange for tying up much less money going forward. Consider your other financial goals, and if they’d be better served by you having more total cash in pocket, or by you having more monthly income to play around with.
• Loans or bank instalments make nicer cars more accessible, but invariably they’ll end up more expensive than if you purchased the vehicle outright. The higher total costs do open up some questions around the 25% and 35% rules, and we’ll get back to that just now.
• Rent-to-buy or lease-to-buy agreements are like loans, except you’re just getting approved for rental, not approved for a loan. At the end of the lease, you’ll have the option to purchase the car at a massively reduced price, to reflect all the money you’ve already spent on monthly payments. Note that, even when reduced, a car’s price can still be substantial, so read all agreements carefully.

Note that leased cars usually come with other conditions as well, such as requirements on how often you use the car, how you must maintain it, and so on.

When it comes to leases or loans, one way to keep things reasonable is to use the 20/4/10 rule, which states:

• The deposit or down payment needs to be 20% of the total price.
• The repayment/ lease structure needs to allow the vehicle to be bought/ paid off within four years.
• Monthly payments (yes, including add-ons like maintenance or insurance) must total no more than 10% of your monthly budget.

These rules aren’t set in stone but the further you go beyond them, the more likely you are to run into financial problems.