Armchair Millionaire

Your Kid in the Driver's Seat

Question of the week:Our teenager has been after us to buy him a car. We think car ownership could be a good way for him to start thinking about how he spends his money. What's the best way for us to help him get a car? And do you think car ownership is a useful tool for teaching children valuable financial lessons? --J. and P.

Dear J. and P.,

The combination of parents, kids and cars never fails to bring out the emotions. For teens, owning a car means freedom. For their parents, it means the welcome end of chauffeuring duties, but also new concerns about their how to be responsible parents and teach their children responsibility, too.

There is a whole range of ways to addresses this issue. When we asked members of the Armchair Millionaire community for their advice on kids and car ownership, we heard every possible perspective. Here are three:

Spring for the car yourself. "I bought my daughter a good used vehicle when she was eighteen and about to graduate high school. I also pay for her insurance. I did this so she could focus more on her college studies. When she was growing up, we agreed that she was to study hard and get good grades and I would provide these luxury items for her in return." --Steve

Go half and half. "I matched my son and daughter's savings for their first car. They had to pay their own insurance. This way they had their own investment in the car and, I feel, took better care of it. They both originally wanted new cars, but when they had saved up about $1,000 they decided a used car was the economical way to go." --William

Let them earn it. "I think that buying your first car is one of the developmental milestones in a kid's life. Plus, you treat something with more respect if you had to earn it. It's the first thing that teaches a kid the value of money." --Sarah

The right answer really depends on you and your teen. You'll first have to decide if car ownership is right for your son at all. Does he need a car to get to a job or school activities, or does he just want one for cruising around town? Is he a good driver? How responsible is he in general?

If you do decide to give him permission to own a car, my guide can help you with the questions you should discuss with him before buying.

The Armchair Millionaire Guide To Teen Car Ownership

• Who will pay for it? There's an argument that if your child earns their own money to buy a car that they'll be more responsible with the car than if it is simply given to them. On the other hand, if you pay for some or all of it, you'll likely have a greater say in the kind of car your teen ends up with and how it gets used. You'll need to strike a balance that works for everyone.
• Should it be new or used? If your teen is putting up the money, consider that buying new will probably not be an option--unless you agree to finance the car or co-sign a loan. If you choose the used car route, you'll want to balance out concerns of economy (older cars are less expensive) with concerns about safely (older cars also have fewer safety features).
• What will it really cost? It's easy for teens to focus only on a car's purchase price, but that's only the beginning of the expense of owning a car. Help your teen run the numbers on exactly what it will cost to fuel, maintain and insure their new wheels every month. Pay particular attention to insurance--both of you may be shocked at the cost of insuring a teenage driver, so check out what it will cost to insure a car before you buy it.
• What about other priorities? There's more to teen finances than cars. In particular, talk about your expectations for your child's contribution to their college expenses.

THE BOTTOM LINE: For most teens, owning a car is their first significant financial responsibility. By taking a balanced, common sense approach, you'll help them move on to adulthood with their finances intact.

Wheeling and Dealing

Question of the week:I'm very tempted to by all the zero percent financing offers to go ahead and get a new car. What's your opinion about those deals?
--LT from Texas

Dear LT,

You have a lot of company these days, as these deals have been in large part responsible for the substantial boost in car sales this year. We asked members of the Armchair Millionaire community your question, and heard strong opinions both for and against. Here are a couple of examples:

Stay away. "It seems like they offer you zero percent and then jack up the retail price, so I'm not really sure it's that great of a deal." --M. Tyger

Go for it. "You can't beat these deals. I got zero percent financing on a Chrysler Sebring and saved $4,000 by not buying a car with interest payments." --John L.

In my own view, zero percent financing is a great marketing tool for the dealers, but usually not such a great deal for consumers. Here are the main reasons I steer away from them:

• You're likely to pay a higher price for the car in order to get the zero percent deal.
• You can generally only get the zero percent deals if you have perfect credit. (In fact, one study showed that less than 10 percent of all car buyers who financed at their dealership received the zero percent rate.)
• The deals only apply to certain models (often the most popular ones) and only new cars.
• Many zero interest deals apply only to shorter term loans--like 24 or 36 months--making the monthly payment too high for some.

If you decide you simply must go after the zero percent offer, I suggest that you love the car, negotiate hard on the price, and walk away if they tell you that you won't qualify. And if you decide the deal isn't right for you, my checklist will guide you through your alternatives.

The Armchair Millionaire Checklist of Car Buying Options

• Pay cash. Imagine that! Yes, people do actually still put down cold hard cash for cars. Pros: You'll have your very own zero percent deal, and no debt monkey on your back. Cons: You'll have to do some serious planning ahead and saving to have the cash on hand when you want to make the buy.

• Get a loan from your bank or credit union. Pros: You can already have your financing in hand when you hit the dealership, giving you an edge in the negotiations. Cons: Your interest is not tax deductible.

• Get a home equity loan. Pros: You'll probably get a good interest rate, plus be able to deduct the interest you pay. Cons: You'll erode the equity you have in your home, and may have to pay some closing fees.

THE BOTTOM LINE: There are no hard and fast rules in the best deals for car financing. You have to sit down with your calculator and run the numbers on each one, figuring in your down payment, the term and interest rate of the loan, and the price of the car.

The Keys to Car Leasing

Question of the week:I'm shopping for a new car and the low monthly payments I'd get by leasing are very attractive. What's your take on leasing a car compared to buying one? --PL

Dear PL,

Those comparatively low monthly payments are exactly what motivate so many people to lease, but you need to look deeper to really understand if leasing or buying is better for your situation. When we asked members of the Armchair Millionaire community about their opinions on buying versus leasing, we got responses in favor of both options. Here are two examples:

"I lease, and I'm very happy with it. We like to get new cars every three or four years, and we don't want to worry about negotiating the trade-in price on the back end, or about costly repairs on an older car. Meanwhile our payments are lower. I have no problem 'renting' a depreciating asset." --Nick

"Buy a good quality car with a reputation for lasting at least 10 years or 200,000 miles and drive it until it won't drive any more. Many folks fret that an older car is always costing them money, in terms of occasional $200 - $500 repairs. But the sad fact is that leasing costs most people that much every month for forever." --Michael B.

In general, leasing might be right for you if:

• For business or personal reasons, you must drive a new or near-new car.
• You drive less than 15,000 miles per year.
• You are able to count lease payments as a business expense.
• You keep your car well maintained and in good condition.
• You're willing to pay more over the long run to avoid the hassles of repairing and selling an older car.

If you decide that you would benefit from leasing your next car, use my checklist to ensure that you get the best deal and minimize extra charges.

The Armchair Millionaire Checklist to Smart Auto Leasing

• Negotiate, negotiate. Just as you should never pay full price when buying a car, you should not agree on a lease that is based on the full sticker price. (In a lease, the "capitalized cost" is the equivalent of the selling price.)

• Look at alternative deals. You don't have to use the dealer's leasing company. Investigate leasing options through independent leasing companies, as well as your bank or credit union, to get the best terms.

• Don't get bushwhacked by fees. Be prepared to pay a range of fees, which can include a security deposit, an acquisition fee (an administration fee charged by the leasing company), a disposition fee (to compensate the leasing company for the expense of selling the car at the end of your lease), sales tax, as well as all the other fees you must pay when you purchase a car, such as registration, license and title fees.

• Make sure the vehicle remains under warranty throughout the lease. If you choose a car with a 36-month warranty, for example, the term of your lease should be no longer than 36 months.

• Be ready to commit to the entire term. If you decide to end the lease earlier than the term specified in your contract, you'll have to pay very high early termination charges.

• Understand "excessive wear and tear." If you turn your car back in at the end of the lease with damage that is greater than "reasonable" (as defined by the leasing company), you'll end up paying a stiff penalty. Know in advance what the leasing company will classify as normal wear, and what it will classify as excessive.

THE BOTTOM LINE: To make a wise decision on whether to buy or lease, look at all associated costs--not just the monthly payment--weigh in your personal circumstances, and then decide if what you get is really worth what you'll pay.

Getting the Best Car Deal

Question of the week:I'm ready to upgrade my old clunker to something much classier, but am dreading the whole process. I'm not even sure if I should buy or lease. How can I make sure I'm getting the best deal? --BMW Fan

Dear BMW,

Buying from a dealer, buying from a private owner, paying cash, financing or leasing-as you know, there are many options. Here is what has worked--and hasn't worked--in the Armchair Millionaire community:

Buy quality used. "We buy cars that are two to four years old because they offer the best value. We use the Blue Book--available at libraries--to determine the exact value of the car so that we don't over pay." --Mike

Buy direct from the owner. "I search the classified ads because buying from private owners usually means that you get a better history of the car. Private owners also seem more willing to negotiate price." --Norris

If you have to have a new car every couple of years for personal or business reasons, don't drive more than 15,000 miles a year, and can't stand the thought of having to deal with selling your used car, you might consider leasing.

Lease it. "I lease because I want a reliable car for family trips and a new car every three years. I figured I'd have a payment anyway, so why not lower it through leasing?" --Andy

Be warned. "I just got out of a lease--what a mistake it was! I'm going to end up owing $1,500 for what they called 'excessive wear and tear.'" --Mitch

If you do choose to go ahead and buy, use my checklist of common sense tactics for ensuring that you get the best possible offer.

The Armchair Millionaire's Checklist for Dealing With Dealers

• Know the price. Start your negotiations from the price on the factory invoice, not from the manufacturer's suggested retail price (also called the "sticker price"). There are Web sites that will help you find out the factory invoice on the car, such as Edmunds.com and consumerreports.org. While the factory invoice is often not the dealers' real cost--they usually pay less after incentives from the factory--it can serve as a good reference point for comparing different dealers' offers.

• Beware of hidden charges. "Floor charges," "dealer preparation charges" and "document preparation charges" are all ways for dealers to sneak in a bit of additional profit on each car. Do not pay them.

• Think twice about buying an extended warranty. Many new cars are very reliable these days and come with their own manufacturer's warranty, so this is one high-cost item you could easily skip.

• Don't assume that the dealer will offer the best financing deal. Check with local banks, your credit union, and on the Internet for loans that offer the best terms and interest rate. And get pre-approved for a loan before you start to shop. That way, if the dealer wants your financing business, he'll have to beat the deal you already have.

THE BOTTOM LINE: Everyone loves getting a new set of wheels, but many become so enamored of that shiny chrome that they may abandon good common sense in the process. Use smart strategies for sticking to your price. Over the last five years, the World Wide Web has turned the tables on car dealers. A little information gives you a lot of leverage.