WE JUST PURCHASED a new car. The whole buying process has been upended by the pandemic and today’s chip shortage, and we learned seven important lessons.
My wife and I view car buying as an unavoidable chore. We know financial experts recommend buying a car that’s a few years old, so someone else takes the big hit on the initial depreciation. We haven’t done that. We like to buy a new vehicle and keep it for 15 or 20 years.
For the past several years, one of our vehicles has been a Ford F150 pickup, which we purchased new in 2005. Our second vehicle has been a Buick LeSabre, which my parents purchased new, also in 2005. We bought it from my mom when she no longer needed it. Six months ago, the engine blew on our pickup. Since then, it’s been sitting in our barn while I decide whether I should spend $6,000 getting a new engine installed. With it out of commission, having only one 18-year-old vehicle doesn’t seem like a wise proposition.
Two weeks ago, I got serious about buying a new vehicle. We decided we wanted a Toyota Highlander SUV. Highlanders come in seven models: L, LE, XLE, XSE, Bronze, Limited and Platinum. Looking at the specs online, we decided an LE had everything we needed.
Our closest metropolitan area is St. Louis, which is some 50 miles away. There are nine Toyota dealers in the St. Louis area. Toyota dealer websites tell how many vehicles of each model they have in stock, with a picture of each vehicle. I planned a day’s outing and went to the three dealers that supposedly had the most Highlander LEs and XLEs in stock.
Lesson 1: Online reports of available inventory are notoriously inaccurate, at least for Toyota. I went to one dealer whose website said it had four Highlander LEs sitting on its lot, ready for purchase. The dealer had one, and the salesperson said that was a fluke. She said the dealership usually has none.
Lesson 2: Many dealers are adding an “administrative fee,” so the buyer is paying more than MSRP. No more haggling and paying less than MSRP, or manufacturer suggested retail price. One dealer was proud that it added no fee. One of the other dealers I saw added $400 to MSRP, while another added $800.
This was a fact-finding day. I was not planning on purchasing anything, but I did drive a Highlander LE at two of the dealerships. I came home and thought about things for a week. I decided I wanted a Highlander Hybrid—partial electric. It’s supposed to get 35 mpg city or highway. It costs a few thousand dollars more, but I did a breakeven analysis. Depending on the price of gas, after 30,000 or 40,000 miles, I’ll save enough in gas to offset the extra cost.
Lesson 3: Sought-after cars are in extremely short supply. I called the nine dealers in the St. Louis area, two dealers in rural areas east of us, and even two dealers in central Iowa, where my mother lives. Twelve of these 13 dealers did not have Highlander Hybrid LE or XLE that I could walk in and buy. Several offered to put us on a waiting list and said we should be able to get a car within six months. For some, to get on their waiting list, we had to make a $500 or $1,000 deposit. Other dealers said we’d have to wait a year or more and didn’t even offer to put us on a waiting list. One dealer said it restricts sales to people within 50 miles of the dealership.
With the next-to-last dealer on my list, I struck paydirt. It had two Highlander Hybrids sitting on its lot, one LE and one XLE. The buyer for the LE had not been approved for financing and the sale had fallen through. My wife and I rearranged our schedule for the day. That afternoon, we went in and bought the LE. We paid $47,210—an MSRP of $43,643, a $499 “administrative” fee, and $3,068 for sales tax and registration fees.
Lesson 4: Take care of details. We have our credit reports locked to reduce the chance of hacking. In my experience, most establishments use TransUnion, so I unlocked our TransUnion credit report before going to the car dealership. Toyota is offering financing on Highlander Hybrids—4.99% for three or four years, 5.99% for five years, or 6.49% for six years. Although we generally pay cash, I wanted to finance this car. I found out Toyota uses Experian and I couldn’t get my Experian report unlocked at the dealership. I settled for the dealership’s best alternative, Fifth Third Bank at 7.35% with no refinancing penalty. Our hometown bank offers 6.75% for six years. We’re in the process of refinancing.
Lesson 5: Financing is out of control. One dealer told us we could purchase a vehicle with literally no money down. Another said we needed to put down $500. Both said a larger down payment wouldn’t reduce the interest rate. Wouldn’t it be prudent for a financing company to require a 20% down payment, or at least 10%? Can people who have saved nothing afford huge monthly payments? We opted to put down $3,768 and financed $43,442. We have payments of $750 per month for 72 months. When we complete our refinancing, our payments will go down about $15 per month.
Lesson 6: The chip shortage is real. Basic economics says that in a free market economy, when there’s a shortage of something, suppliers increase production. When I asked salespeople why Toyota doesn’t ramp up production of Highlander Hybrids, the reason always given was a shortage of computer chips. Also, because of the chip shortage, we received just one key with our new car. A second key will be sent to us at some indefinite time in the future.
Lesson 7: The used car market is wonky. I checked both Carvana and Carmax for used Highlander Hybrids. We could buy a one- or two-year-old Highlander Hybrid LE, with 20,000 or 30,000 miles on it, for a few thousand dollars more than we paid for our new car. When I told this to my brother, he replied, “Yes, but you can have the car this week.”
I know it makes me sound old when I say this, but we purchased our first home—a small but comfortable split-level with three bedrooms, one bathroom and a one-car garage—for $46,000 in 1981. That’s somewhat less than the cost of our new car.
Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey’s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry’s earlier articles.