With cars sitting on the dealership lot for longer periods of time, and financing getting harder for consumers to get. Many dealerships are lowering prices on cars to do anything to move inventory. Some are even willing to sell at zero to negative margins. Why?

Well not many people realize, but those cars sitting on the lot are costing insurance each day they go unsold. This monthly payment eats into profits the longer the car sits. Another more obvious reason is, depreciation. Just like many goods, the longer you hold on to a car, the lower the value it becomes – this is why I’m really not into buying/leasing a car that is beyond my means. Basically if the dealership is getting a 2008 model car sitting on its lot anywhere from last month and into 2009, its probably already been replaced with a new model that the consumer will prefer.

In the news tonight it was posted how many of the automotive companies are cutting back production to push idle inventory off lots and reduce expenses. Even more drastic, the American automakers just said they are going to shut down the factories for a whole month!

Now for a buyer, what does this mean? Well, if you can afford to at the moment, you can probably get a really good deal. But what is a good deal? What should a person look for when buying a car??

Many people only look at the sticker price of a car and forget about further expenses. I have listed some potential costs that you should worry about:

1. Car price and depreciation over 1,2 and 3 years. Many cars lose anywhere from 20-30% of their resale value in the first year. This is not a myth. If you are planning on purchasing a car (not lease), this is an important number to know as owning a car, eventually you might decide to sell the car and should be aware of resale trends for your particular car

2. Options. When you buy new, you get to customize the details on the car. Some will charge $400 for a rust proof, other options also include GPS, leather, etc. All these will add significant increases to your initial purchase price. While some options like leather and GPS might help retain better resale value. Something like XM Satellite radio might not. So do keep in mind that you want to try and get back as much as possible as your about to put in.

3. Insurance. Almost every state and province requires a certain minimum level of insurance. Based on your area and the car you are going to buy, this price can easily add $80-300/month in expenses.

4. Gas. Every car runs on this magic liquid. Our dependence on this fuel is the reason we curse the pumps as the price for a fill up increases. Do not buy a truck if you dont need it. Look for fuel economy and realistic use for your mode of transportation. Doing so, you can budget and save for other expenses.

5. Maintenance. Many new cars are very reliable and dont require major repairs well into later years. However, some things like an oil change, tune up, tires, etc all are expenses that you need to factor into your budget. Can you afford an SUV because the price is cheap but the 20 inch tires cost double what you anticipated? or the tune up on a BMW compared to a Toyota?? These may not be expenses you worry about when your inhaling that new car scent, but are costs that will arise.

These are just the basic things you need to look for when getting a car. Always do your research and remember, as good as the deal your salesperson is giving you now, you can probably get something better.

Here is a quick Canadian video on buying a car:

Also, Yahoo Auto has a cool link that can even pinpoint based on your Zip Code what the cost to own a particular car is. LINK. Here you can compare 2 – 4 cars and then look for the tab “total cost to own” which will detail all expenses such as cost/mile, repair costs, maintenance, etc. Its a really valuable link for everyone to keep in mind when looking for that dream car.

Remember, always do your research and look for discounts you might be eligible for either for being a member of certain clubs (Costco) or as a recent Graduate. Buying a car is not a process that should be taken lightly. Know what you realistically want and can afford, know the options you have and you will drive off with a great deal.

Happy Investing!

Aman, MBA

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