I have a confession to make, but I’m a bit embarrassed to admit it. I bought a used car. Please don’t judge me for this news update. Would you allow me to explain why a frugal guy like me did this and how I made it as frugal as possible? Pretty please?
For starters, I’m moving out of Iowa City this year to another city nearby. The rents are cheaper there, but it’ll require a little commute. Without a car, the move would be impossible. There’s no regular, public transportation available. I wouldn’t be able to make it to school and work each day.
I fretted over this decision for quite some time. I remembered how stressed and awful I felt with a car. It encouraged me to be lazy — driving instead of biking or walking. Additionally, the car loan I had left me nearly penniless each month. I couldn’t save much.
For the last year-and-a-half, I went without a car. I sold it, paid off the remainder of my car loan, and began saving hundreds of dollars by biking everywhere. The commutes to grocery stores, school, and work were tiring, but I was saving every pedal of the way. In fact, over this last 18 months, I saved thousands of dollars.
Now, I’m re-entering the world of car ownership. To make this purchase, I needed another car loan. I paid off about two-fifths of the total price and financed the rest of a $10,000 2014 Volkswagen Jetta. Let’s dig a little deeper into why I chose this car and how I made it as frugal as possible.
Make time for the search
When someone finally decides to buy a car, two pressures tend to take hold: I want it now and I need it now thinking. The want it now has extra time to find a good value, but feel compelled to be zooming around in one as soon as possible. The secondary, need it now group has not left enough time to thoroughly search. They don’t have the luxury of looking.
If at all possible, plan for a car search. Begin it as soon as you get an inkling you’ll need a car. For me, I knew about 6-7 months ago a car would be needed. I started browsing Craigslist, eBay Motors, and dealers’ websites for more information about what was available, pricing, and distance from me.
Then, for every car that sparked my interest and seemed like a good deal, I researched price expectations, reliability information, ratings, and true cost of ownership. Around the same time, I visited my car insurance’s website to calculate expected monthly costs for every possible iteration. By the end of my 6 month search, I knew my stuff — I just needed the car.
Use a credit union for financing
Big banks have one motivation: big profit. When it comes to financing, they’re usually a last resort — regardless of credit history, score, or income. Unless you are immensely wealthy, big banks can’t help save you money on a car loan.
When I was gearing up to buy my first car a few years ago, the first trip I made was to Wells Fargo. I’d been a banking customer with them for 6 years at the time. Curious to know what they’d offer me, I asked the loan officer and was told I should expect double-digit interest on any loan duration or amount. I laughed out loud at the absurdity, and asked if those were the final offers. They were.
I found solace at a credit union; PenFed, to be more specific. Credit unions run on shareholders, much like banks do. The key distinction is that shareholders are credit union members. If you open an account, you usually become a shareholder. You can vote on new board members, propose programs, and advocate for fairer pricing. Credit unions are motivated to help their members succeed. They’re not in it solely for the profit.
With my used VW Jetta, PenFed was able to give me a 2.49% car loan for four years. Even though I’m spreading the remainder of the car over four years, the payments add up rapidly. Fortunately, little will be going back to the bank as interest.
Find rental/fleet vehicles
When you look at the price I paid versus the expected price for a 2014 VW Jetta (upwards of $12,000 for one in this condition), you might wonder, how the heck did he do it?! The key was finding a rental vehicle in this instance.
There’s an underlying assumption that rental and fleet vehicles get driven harder than personally owned vehicles. In fact, it’s pervasive if you look into buying rental cars. Commenters and “experts” weigh in to tell you what they think, but the best advice I’ve seen comes from Bankrate.com:
While we all know rental cars have somewhat of a bad reputation as cars that have suffered abuse by their renters, there’s no guarantee any used car you buy hasn’t been abused in the same way unless you personally know its history.
It simply comes down to logic and critical thinking on this one. All used cars get driven, right? When we buy a used vehicle, we assume either the individual owner or dealer is telling the truth. Some rental vehicles get driven hard, and some non-rental used cars get driven hard, as well. There’s really no way of knowing.
Amidst the murkiness, you can often find a good deal. Whether true or not, people tend to discount these cars and the dealers usually do, too.
Find a friend — don’t go alone
Whether you go to a dealer, a Craigslist creeper, or your neighbor, scoping out used cars can be tricky. It’s hard to check over an entire car at one look, and oftentimes test drives don’t allow the potential purchaser to spot the defects. This is a simple instance where four eyes and two brains are better than yours alone.
When I went shopping, I tried to bring a good friend of mine who also happens to know cars. That allowed me to assume a role when at dealerships and individual’s cars. I could play stupid, as my friend checked under the hood, around the brakes, inside the wheel well, etc. This team effort allowed me to focus on what the seller was saying to pay careful attention to the words shared.
Additionally, having two people present makes a more convincing argument. When you’re negotiating a final offer, having an “expert” around can help convince someone to lower the amount. It’s a game of triangulation against the seller, and if you can perfect it, the prices can become much better.
Alright, now I’d love to know what secrets you have to securing a good value when shopping for used cars. What tips do you have?
What Are Terms And Conditions?
I applied for my first credit card in 2007. On that fateful day, I was approved for a cash back card, a small signup bonus, and given a starting credit score – all with no annual fee. The glory days were here! I was finally an adult, with a credit card.
But it wasn’t until I received the credit card in the mail that I finally spent some time reviewing all the fine print – the terms and conditions. Printed on fine, tissue-like paper was a series of rules – all in small, black font – that extolled the consequences of misuse and the agreements that I must follow. What had I signed up for?!
Now, as a frugal, thrifty, and penny-pinching maverick I’m here to tell you a simple truth: You need to read the terms and conditions before you signup for a credit card. Isn’t that simple? When you signup for a credit card, you’re entering a formal contract with a bank to repay all debts – no matter what. As a member of this contract, it’s important to spend some time reviewing these documents to make sure it’s a fair deal.
The Schumer Box
In 1988, Senator Charles Schumer from New York introduced the concept of a box (“The Schumer Box“) that would graphically outline the details of credit card agreements and accompanying materials. The Senator’s idea became a law and took effect in 1989. Essentially, the Senator was pioneering what education and literacy experts were arguing for: An easier way to read financial documents.
Included in the Schumer Box:
- Any annual fees
- Annual percentage rate (APR)
- Other APRs (i.e., balance transfers, cash advances, default APRs)
- Grace period
- Other transactions fees
Jargon and complicated contract law had largely prevented people without excessive degrees – or letters behind their name – from understanding what the heck was being said. The Schumer Box was an easy interface for everyday people, and it increased comprehension across socio-economic divides.
But in 2007, as I applied for my first credit card, the Schumer Box didn’t help me. I wasn’t paying attention, and was just too “grateful” to realize I need to critically evaluate the documents in front of me. These days it’s easier to find out more information online. For example, you can read a review of the Chase Sapphire Reserved card and get some critical details at a glance. This is key: Better to prepare than react when it comes to finances and debt. Actually, it’s better to prepare in every facet of life – finances should be no different.
The Credit Card Act Of 2009
In 2009, the Credit Card Act was signed into law. The goal of the legislation was to
“…establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, and for other purposes.”
With the lofty desire to enhance the transparency of credit card terms and conditions, the CARD act encouraged companies to create shorter documents that were easier than ever to understand. A variety of stipulations such as overlimit fees and distress-inducing repricing actions were nearly eliminated. These fees normally hit low-income and lower-middle-class households. They were being nickel and dimed by a variety of these increases and fees – with a seemingly unregulated market for swift changes that targeted consumers trying to pay off credit card debt.
Isn’t it ironic that a law aiming to increase transparency used direct financial jargon to explain the purpose? Nonetheless, “open end consumer credit” is a credit card and/or revolving line of credit that is issued by a bank to a consumer (you). The Act told credit card issuers to find ways to explain their products, terms, and liabilities in plain English. But like so much legislation in Congress, it didn’t have teeth.
“One of the expressed goals of the CARD Act was to improve transparency in the credit card market, but the Act did not explicitly mandate any changes in the length and form of credit card agreements.”
Despite the cautious recommendation to streamline and enhance comprehension, credit card companies actually conformed to these new standards and tended to aid in the presentation of credit card terms and conditions. Between 2008 and 2012, the average word count of agreements fell 24.4% (see picture below).
Along with shorter agreements, the banks issued terms and conditions that were easier to read. In 1948, Rudolf Flesch introduced a simple mathematical formula that suggested a grade level equivalent for the amount of text, sentence structure, and word choice. Using this method of analysis, the credit card companies have lowered the average reading level from 11.5 to 9.8 from 2008 to 2012. By doing so, the banks made agreements more accessible and easier to understand; frankly, they became fairer instruments, as both parties could better understand what they were agreeing to.
What Does This All Mean For You?
Next time you’re thinking about signing up for an awesome rewards credit card, think about the terms and conditions you’re ultimately agreeing to. Scientifically speaking, it’s easier than ever to understand and comprehend what a credit issuer is offering. By taking some time to critically evaluate what’s being shared, you can save yourself lots of heartache down the road. Use the Schumer Box to check for ancillary fees and exorbitant annual percentage. Use the CARD Act’s regulations to read carefully through the agreement and don’t hesitate to ask the issuer questions before you sign the dotted line.
Do you read the terms and conditions before you signup for a new credit card?