Our Conversation with an Automotive Specialist to Help Us Understand This
No doubt you have heard that we are in the midst of one of the most surreal car markets ever. We can’t remember a time like this. Even if you have the money to purchase an automobile outright, you may not be able to. From supply chain issues to chip shortages, this is definitely an interesting time for car buyers. To help us make sense of all this, Mentoro sat down with Daniel Tu of Sewell Automotive.
To begin, we asked Daniel what has led to the shortage of automobiles. He explained this is due to a few factors. First, when the world shut down in 2020, automobile production and sales naturally slowed. However, when things started opening back up, car dealerships saw one of the highest demands ever. This, factored in with supply chain issues, led to the shortages we are still seeing today. In addition, Daniel explained there are many factors that go into making an automobile. Most of us have heard about chips that control electronical components in cars but things we don’t give much thought to include the glass for windshields and windows, rubber for the tires and the wiring for the electronics. In fact, some of the wiring comes from Ukraine and the war going on there has obviously slowed this down. Auto manufacturers don’t hold all these parts at the factory. When one part is not in stock, that slows down production. Add that to high demand and it has created the perfect storm in the auto industry. Daniel pointed out things are getting better and back to normal but certain models and makes continue to be difficult to find.
We then discussed what it means to purchase a car. Daniel pointed out that purchasing a car is a financial commitment. He also stated, “Cars are a depreciating asset but are tools to get you to work and take your family around.” To unpack that a bit, when something depreciates, it goes down in value. So, even though an automobile may not be a smart investment, it can enable you to earn money if you drive it to/from work.
Daniel also suggested you know your credit history when looking to purchase an automobile. In fact, this is a huge factor. Daniel elaborated by explaining many do not purchase a car with cash – they either finance or lease. For those fresh out of college, this can be troublesome. After graduation, many are making more than they ever have. They are ready for their first big purchase – oftentimes this is a set of wheels. However, they may have difficulty getting it financed. Banks will take a look at your debt-to-income ratio. This compares how much you owe each money to how much you earn. In addition, banks will take a look at your borrowing history. They look at every loan they make as being risky. If you do not have a history of paying off a loan, banks may view you as being high risk and not issue you a loan or, if they do, charge a high interest rate for doing so. To help secure financing, Daniel recommends you start using a credit card as early as possible and treat it like a debit card; that is, only buy things you can afford and pay it off each month.
Next, we discussed leasing and when that makes sense. Daniel recommends leasing if you are looking for a luxury vehicle. He explained that when you lease, you are paying for the depreciation of the automobile. In addition, when leasing, you are always in the time frame covered by a warranty. This ensures that if something needs to be fixed or replaced, it will not come out of your pocket. In addition, Daniel pointed out perhaps the greatest advantage of leasing – flexibility. As your family dynamics change, you have the ability to have your vehicle do the same.
Another hot topic we discussed was the rise in the use of electric vehicles. Daniel said that many either love or hate these – there is not much middle ground in this debate. While an electric vehicle may save you money over time, Daniel suggested, “Buy an electric car because you want to buy that car, not to save money.”
To conclude our conversation, we asked Daniel what is the biggest mistake others make when buying an automobile. He feels buying a car you can’t really afford to keep has to be at the top of the list. He explained that just because you can afford the monthly payments doesn’t mean you can really afford the vehicle since repairs may need to be made. To see if you can truly afford your ride, Daniel recommends asking yourself, “At my worst month, what can I afford?” Sound financial advice for any situation!
No matter where you are in the car buying process, we are here to help. As a Mentoro member, you have access to great budgeting tools that can help you easily see how much car you can afford. Visit mymentoro.com today to set up your account.