Ask Liz Weston

Dear Liz: My husband and I own a car that’s on its last legs, and we are contemplating a replacement.

Normally we buy used, but the kind of car we want is not readily available as a gently used vehicle because people tend to keep this type of car for a long time. Also, the resale values tend to be high, so if we do find one that’s just a few years old, it’s likely to cost more than what we’ve saved so far.

Might it be a better idea for us to buy a new version with dealer incentives, such as low-rate financing, rather than continue searching for a used version to buy with cash?

Answer: You’ll save a lot of money over your lifetime if you use cash to buy cars that are a few years old and then drive them for at least 10 years.

Buying used avoids the steep depreciation that erodes new-car values as soon as you drive the vehicle off the dealer’s lot. Not replacing cars frequently also saves you money and gives you time to build up cash for the next purchase.

The problem with financing cars is that it can encourage you to buy more vehicle than you can really afford. Before you let dealer incentives sway you, check out car comparison site Edmunds.com’s “True Cost to Own” feature. This handy guide shows you all the costs of owning a vehicle, including insurance, maintenance and repairs. In many cases, the true cost of owning a car is double, or more, the monthly payment.

That’s not to say you can never buy new or never finance a car. But you should make sure it really fits your budget, and put strict limits on your spending (because lenders certainly won’t).

If you’re going to finance a car, put at least 20% down — more if possible. Limit the loan to no more than four years, and make sure the payment doesn’t exceed 10% of your gross income. A 5% limit is better for those with considerable mortgage payments or other debt.

Frugalistas know that the best way to own a car is to buy one gently used, for cash if possible, and then drive it for 10 years or so.

The reason you buy used is to avoid the big, initial loss in value from the depreciation that happens as soon as you drive a new car off the lot.

But now those who have followed this advice have a one-time chance to upgrade to a new car without feeling any tightwad guilt.

That’s because the cash-for-clunkers rebates of up to $4,500 will offset most if not all of the depreciation from buying a new vehicle.

So if you’ve been rattling around town in a jalopy that gets 18 miles per gallon or less and you can afford to buy a new car (either with cash or a loan that lasts four years or less), now may be the time.

The rebates only apply to the purchase of new vehicles, and there are other restrictions. CLICK HERE to visit Cars.gov, the government’s official Cash-for-Clunkers site.

For more on smart ways to buy and own cars, read:

• Make your car last 250,000 miles
• 16 favorite money rules of thumb
• High-tech cars mean high-priced repairs
• The real reason you’re broke

Many young first-time car buyers are making one of the biggest purchases of their lives without parental advice and without knowing their own credit scores, according to a new survey by Capital One Auto Finance.

The survey, conducted by Braun Research, found that:

• More than half of those surveyed (52 percent) said their parents have not discussed budgeting for car expenses
• 64 percent say their parents have not talked to them about financing options
• More than half (56%) expected to finance their purchase, and nearly 82 percent of car buyers were aware that their credit scores could impact the interest rates they would be offered. Yet a whopping 72 percent of those who planned to finance their first car purchase had never checked their credit reports or credit scores.

Capital One’s findings are based on an online survey conducted by Braun Research of Princeton, NJ., which completed interviews with 404 parents between 45 and 55 years of age, all of whom have at least one child and own a motor vehicle. Braun Research also interviewed 400 young adults between the ages of 18 and 25 years of age who are planning to buy their first motor vehicle in the next year. The interviews were conducted between May 1, 2009 to May 13, 2009. The margin of error for this study is ± 4.9 percentage points for each group.

Now, it’s entirely possible your parents aren’t the best source for information on the car purchasing process, given how many older people overspend on cars. But if you’re going to borrow to buy a vehicle, you darn well better understand what you’re getting into.

That means:

• Knowing your FICO scores (available for about $16 apiece at MyFico.com) and what interest rate those should get you
• Setting your own limits on how much you will borrow (preferably making at least 20% down payment, with a loan no longer than four years and a payment of no more than 10% of your gross income)
• Getting approved for a loan first at your local credit union, so that you don’t have to rely on dealer financing (but you can still take advantage of a better deal, if the dealer offers one)

For a wealth of information on negotiating a car purchase, check out Edmunds.com and see these columns for more financial tips:

• 7 fast fixes for your credit scores
  
• Should you buy from a dying automaker?
• What a car wreck could cost you