Advice from Nashville's Financial Guru Dave Ramsey

Dave Says
By Dave Ramsey
Author of Financial Peace and The Total Money Makeover
11/23/2004

What are your Tips for buying cars with cash?

Dear Dave,

What advice do you have for people buying a car with cash?

Mark in Charleston, SC



Dear Mark,

First of all, don’t look at a car as anything except a negotiation. You’re negotiating the purchase. 

Second, don’t buy a new car, period. Unless you’ve got $10 million dollars, you feel like wasting some money, and this represents a small percentage of your world, then it’s OK. In that case it’s like me buying a Happy Meal. Everybody who isn’t a multi-millionaire needs to buy used cars at least one or two years old. That first year or two is when most of the value is lost on a new car. 

Now, on to negotiating with anyone about anything, cars included. You have to understand that when you’re buying from a company that is selling an item; they are selling that item for a profit. They have paid something for this item, called a cost of goods sold in accounting. So if they paid $20,000 for an automobile, they aren’t going to sell it for less than that, unless they’re going out of business. Selling for less would be at a loss and you don’t stay in business long doing that. Therefore, you need to have an idea of what their cost might be. Used car dealers usually have a pretty good markup on their cars, so you need to know what wholesale is on the car and assume that’s what they’ve got invested in it. Then you know you’re probably not going to buy it for less than that. 

This is why it’s actually preferable to buy from individuals. Their cost of goods sold - what they paid for it – doesn’t matter any more. What they have tied up in the car, they need to turn into money. So, generally you can get a better deal with an individual. Used car dealers usually do a good job and this misnomer that they’re all crooks is wrong. But you’re also not going to “steal” a car from them in the deal either.
Dave

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