As you may already know, the cost of car insurance can vary greatly between different car makes and models.  If you buy a car that has high insurance premiums, the total of your car payments and insurance payments may be much higher than you expected — maybe even more than you can afford.

Let’s say you got a great price on a brand new Subaru Impreza WRX and also got a nice low-interest loan to create low monthly payments. You then go to your auto insurance company and are startled to find out that insurance coverage on that particular vehicle is higher than just about any other vehicle you could have bought — particularly if you are a teen or young adult.

It’s true that the Subaru WRX is one of the most expensive vehicles to insure, along with other vehicles such as the Scion tC, Hyundai Tiburon, Honda Civic Si, Dodge Charger, and Nissan 350Z/370Z.

Do you see the similarity in the vehicles in this list of expensive-to-insure vehicles?

They are all small, high-performance coupes that are popular with young male drivers — who wreck them frequently. In fact, young male drivers who buy these vehicles can expect to pay outrageous insurance rates — because the risk of having an accident and filing an insurance claim is very high.

But what does that have to do with the cost of auto insurance for drivers who are older, and maybe not even the same gender, who buy these vehicles? Do we also have to pay higher rates?

Yes.

Why?

Because insurance companies must spread the cost around. If they charged young male drivers of these vehicles the entire cost of the increased risk they create, the cost of insurance for them would be prohibitive. They couldn’t afford to pay. They couldn’t afford to drive.

So, to reduce the cost to those at higher risk, insurance companies pass along some of the cost to those of us who are lower risk. Even if you are 60 years old with a perfect driving record, you will pay a much higher car insurance premium for a Honda Civic Si coupe than for a less exciting Toyota Camry 4-door sedan.

Said another way, young male drivers actually get a break and don’t have to pay their fair share because older drivers pay part of the cost for them.

Generally, the cost of insurance increases for vehicles that are most expensive to repair, vehicles that are stolen most often, and vehicles that are wrecked most often (according to insurance industry statistics). Vehicles that primarily appeal to young drivers are more expensive to insure than vehicles that appeal primarily to older drivers.

So, regardless of your age and driving record, you should research the cost of auto insurance on the vehicle you plan to buy before you buy. Your great car deal can easily turn sour if your insurance costs skyrocket.

What is the best way to research insurance costs before you buy?

Simple. Just call your own auto insurance company. But don’t assume your own company has the best rates. It’s always a good idea to get multiple quotes. The quotes are free, so why not? It’s easy to get quotes from online car insurance companies, such as NetQuote.com, who gives you quotes from up to five different insurance providers so that you can compare and choose the best deal for you. This is the only way to make sure you are getting the cheapest auto insurance coverage that meets your particular needs.

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If this question were being answered just a few years ago, it would be an easy answer: Buy a good used car. You would get more for your money. You avoided the high first-year value depreciation. Although you risked buying someone else’s problems, you reduce those risks by buying a car, such as Honda or Toyota, that have high reliability and high resale values.

However, the car-buying world has changed. It has changed dramatically. Old rules don’t apply anymore.  Old advice is not valid now. It’s a completely new world.

What’s changed?

Let’s look at used cars first. Used car prices are at record highs right now. Why? There’s a big shortage of used cars that was created over the last year or so because 1) consumers cut back on buying new cars due to the bad economy; they held on to their old cars longer, and 2) the success of the the “cash for clunkers” program that took many good used cars off the road and caused them to be destroyed. The shortage has decreased supply, which has caused dealer wholesale auction prices to increase , which has caused retail prices to rise. Buying a used car now is simply more expensive than in the past.

Now, let’s look at what’s been happening with new cars. Average new-car prices have fallen dramatically recently. Why? With all the heavy incentive programs (rebates, bonus cash, loyalty bonuses, factory-to-dealer cash, 0% loans, special lease deal, free maintenance), brand new cars are the best bargains they’ve ever been. Car manufacturers and dealers are desperate for customers’ business. Deals have never been better.

The result of all this is that the actual drive-out price difference between new cars and used cars has been greatly reduced. In fact, it’s not difficult to find brand-new car prices that are actually better than prices for the same model used cars that are one or two years older. Old arguments for buying used cars are not as compelling any more.

The reason that leasing took a slide is not that automotive consumers didn’t want it; car manufacturers (especially American manufacturers) lost their shirts by being too agressive with their lease deals. Consumers loved it but many car makers lost millions and millions of dollars.

So they slowed down and even stopped leasing in some cases. Now, in 2010, they are returning — in a big way. Not so much by the American companies yet, but nearly all other car companies are now offering some of the best lease deals we’ve seen in a long time.

Some of the car makers currently offering special car lease deals are Honda, Acura, Nissan, Toyota, Mercedes, Mazda, Mitsubishi, Scion, Subaru, Volkswagen, Volvo, Infiniti, Audi, Hyundai, Jaguar, Land Rover. General Motors is offering a few special leases, but Chrysler and Ford are offering none.

Many people could easily qualify and be paying far less in monthly car payments if they leased their car.

However, they don’t because they 1) don’t understand leasing and are afraid of it, 2) think it’s like throw-your-money-away apartment leasing (which it’s not), 3) think it’s only for businesses and tax benefits, or 4) have gotten bad advice from friends or relatives (who don’t understand it either).

So what are the benefits of leasing?

First, monthly payments are 30%-60% less than car loan payments, for the same car. Second, if you like to trade cars every few years, with leasing, you don’t have the hassle of selling or trading a used car. Third, there’s usually no down payment required. Fourth, in most states, you save on sales tax. And fifth, you get automatic free GAP insurance with most leases (in case your car is stolen or wrecked). 

Car leasing is not renting. It’s simply an alternative way of financing a car if you know you will want another new car in 3-4 years. You pay only for the part of the car you use — the amount that it depreciates in value — rather than the entire price of the car. People who buy cars with loans lose money on trade or sale due to depreciation.

Car leasing works best for people who drive an average number of miles each year (about 15K miles), who have a stable lifestyle (ending a lease early can be expensive), and who take good care of their cars (returning a leased car with damages can be expensive).

Monthly car lease payments depend on several factors. Most important is the price of the car. Many people who lease don’t undertand that you should negotiate the price of the car, or take advantage of rebates, the same as if you were buying the car. The lower the price, the lower your monthly lease payments.

Second, the lease-end residual value is important. This is the estimated value of the vehicle at the end of the lease. The higher the residual value, the lower your monthly payment. Some car brands and models have higher lease residual values than others. See How to Get the Best Lease Deals for more details.

Third, money factor should be as low as possible. Money factor is an expression of the interest rate you pay on your lease financing. It’s a small number such as .0022, which is equivalent to 5.28% APR interest. Just multiply the money factor by 2400 to get equivalent interest rate. The lower the money factor, the lower your monthly lease payment.

Leasing is not right for everyone. But if you are a good leasing candidate, you can save money on your new cars if you lease — especially now that so many car companies are offering incredible lease deals.

To better understand car leasing, we recommend that you visit LeaseGuide.com and check out the free Car Leasing Guide, which is an online aid to understanding how car leasing works. There’s also a Lease Calculator you can use to calculate monthly lease payments for any new car.

The overall best car this year is the Lexus LS 460L. It is rated 99 out of a possible 100, which is outstanding.

Other top rated makes and models are as follows:

Best Sports Sedan – Infiniti G37

Best Family Hauler (wagon, minivan, microvan) – Mazda Mazda5

Best Pickup Truck – Chevrolet Silverado 1500

Best Green Car – Toyota Prius

Best Family SUV – Chevrolet Traverse

Best Fuel Economy – Toyota Prius, Smart ForTwo, Honda Insight

Best Overall Safety – Kia Soul (small car), Acura TL (family & upscale car), Honda CR-V (small SUV), Acura MDX (midsize SUV)

Best Roadtest – Lexus LS 460L, Infiniti M35 X, BMW 135i

Best Cars Under $20,000 – Ford Focus SES, Honda Civic LX, Honda Fit

Of course, the magazine has the full details of each car’s evaluation and test results. You can also get the same information (for a small fee) on the magazine’s website at consumerreports.org.  Anyone who is thinking of buying a new car should always consult CR data before making a decision. Not only will you learn which cars had the best results, but you will also discover which cars had the worst results.

Most people go to car dealers because they want to know about that dealer’s brand of cars, what models are offered, what options are available, about gas mileage and safety ratings, about benefits his cars have over a competitor’s, about what cars the dealer has in stock, and at what prices. Some people also want to know how they might finance their purchase and if they can buy within their monthly budget.

In other words, we look to a dealer sales person — repeat, sales person —  to educate us about the car we might want and how to finance it. Sales people usually do a pretty good job at educating us but keep in mind that everything a sales person does and says is aimed at only a single objective — selling a car for the best possible profit for the dealership.

When you visit the dealer’s showroom or sales lot, you are on their home turf where they have the advantage. That’s where they want you to be. That’s where they can be more effective in what they do best, selling cars. Most customers who come in to buy a car on their own terms, get sold a car on the dealer’s terms.

So, how can we as car buyers retain control over the car buying process?

Don’t visit the dealer until the deal is done and you must go in to sign papers and pick up your car. Even those last steps can be avoided if you ask the dealer to send you the papers and deliver your car to you.

Fortunately, with the availability of the telephone, fax, the Internet, email, and FedEx, automotive consumers can now buy cars without setting foot in a dealer’s showroom — and stay in control of the process. It’s done every day by smart car buyers.

You can do all your research about cars on the Internet. With web sites such as Edmunds.com, Cars.com, Yahoo Autos, Consumer Reports, and hundreds of car enthusiast forums, not to mention car manufacturers’ web sites and dealer web sites, you can find everything you need to know without setting foot in a dealer’s showroom.

You can find out what models are available, in what styles, in what colors, with what options, and at what safety and reliability ratings. On some sites, you can compare one model against others. You can find retail prices, invoice prices, True Market Value prices (Edmunds), available incentives, and find out what other people are paying on owner forums. 

You can get test-drive and reliability reports and ratings from Consumer Reports and other car magazine web sites. On many dealer web sites, you can even find out what car models and styles/colors are available in inventory. You can also find online car loan calculators to compute monthly payments — and even shop for car loans online (you don’t have to use a dealer’s loan sources).

When you know exactly the car you want, contact local dealers and ask for price quotes. You can do it through the Internet via price request forms, via email, fax, or simply call the dealer and ask for their Internet sales department. By dealing with the Internet sales department you usually skip the on-floor commissioned sales staff with their heavy-handed sales tactics.

Tell the dealer exactly what you want and the price you want — or simply request his best quote. Of course, you should have already done your pricing homework and know about what you should have to pay. Unless you want to get into a long negotiating battle over the phone or via email, you should make your price expectations reasonable. If the dealer sees that you are low-balling with unreasonable price requests, you won’t get much respect from that point on.  However, if you work with more than one dealer, you will have the luxury of multiple price quotes that you can choose from.

Once you and a dealer have settled on a price, you could go down and look at the car, test drive it, sign the papers and drive away. Or you can ask the dealer to deliver the car to you at work or home, where you can inspect and drive it.

If you decide to go to the dealer to sign papers, be aware that you’ll be talking to the Finance and Insurance (F&I) manager, whose job is to not only work up the papers for your purchase  but to also try to persuade you to buy “extra profit” items such as security devices, paint protectant, credit insurance, and extended warranties. You won’t need most of this stuff.

In summary, by avoiding a dealer’s showroom, you can take control of your new-car purchases and save money. It’s a little extra work but you’ll be glad you did it.

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Keep in mind that car insurance costs can vary widely between insurance companies for the same car and same individual. And rates change frequently. The cheapest insurance company this year might not be the cheapest next year. The company that has the best rates for a young driver may not have the best rates for an older driver. The company that has the lowest rates in one city and state may not have the lowest rates in another city and state.

So how do find the cheapest auto insurance rates?

Simple. You ask for rates from a number of different companies, compare them, and go with the most affordable. Insurance quotes are free and there’s no obligation to accept any of them.  Then, in about a year, you do it again because rates can change in that timeframe.

Understand that auto insurance companies have a complicated risk-based system that determines rates. Rates are based on the age of the insured, his driving record, where he lives, where he drives, how much he drives, for what purpose he drives, the make/model/age of his vehicle, if he has other insurance with the same company, and his credit score. Yes, many insurance companies have determined that people with poor credit scores are more likely to submit car insurance claims, and therefore should pay higher insurance rates.

How much insurance should you buy?

Many people try to cut costs and only buy the state-required minimum liability coverage. Unfortunately, these minimums were set years ago before cars became so expensive and before big liability law suits became so common. In some state, for example, the minimum coverage is $15,000.

Let’s say you cause an accident and destroy someone’s $30,000 car. After your insurance pays $15,000, you will be held responsible for paying the remaining $15,000. Therefore, you should have a minimum of $50,000 liability coverage — or risk financial disaster.

You should also have collision and comprehensive coverage.

Collision insurance pays for the cost of repairs to your own vehicle. Unless you have a big bank account, having collision coverage is important to avoiding the high cost of damage repairs.

Comprehensive insurance protects you if your car is destroyed by fire, totaled in an accident, or stolen. This is especially important if you have a loan on your vehicle. However, if you are “upside down” on your loan, your insurance will only pay the value of your vehicle, not what you still owe on your loan. For more protection in that situation, you should have “gap” insurance (see What is Gap Insurance for more details).

To summarize, the only way to get the best auto insurance rates is simply to request free rate quotes from a number of different companies.

The insurance business is so competitive that these companies are fighting for your business.

One  of the easiest and quickest ways to get multiple quotes from different companies is to go to a broker web site, such as NetQuote.com, that work with all the major insurers. Fill out your information once, and get quotes back from the companies that would work best for you.

What is gap insurance? Why would you need it?

Let’s say you bought a new car and paid $30,000. You made $2000 down payment and financed the remaining $28,000 with an auto loan, for 60 months. With five years to pay, your monthly payments are relatively low but those payments don’t keep up with the rapid depeciation in value that your car experiences.

So, for most of your payment term you are “upside down,” which means at any point in time, your loan balance is more than the current value of your car.

You then have an accident in which your car is totaled, or your car is stolen. Your insurance, or the at-fault party’s insurance, will only pay the current value of the car, not what is still owed on your loan. The difference is called the “gap.” Without separate gap insurance, you are responsible for that difference, which could be thousands of dollars.

Many people in this situation are shocked to learn that their insurance doesn’t pay the full amount of the loan payoff. Some also think, if the accident was caused by someone else, that the other person is responsible for the loan payoff. Not true.

Gap insurance was not something needed in the “old days” of car buying. Buyers usually made a healthy down payment — at least 20% — and paid off their loans in no more than 3 years. They also didn’t roll over balances on trade-in vehicles as is common today.

If you plan to buy a car with little or no down payment, get a long-term loan (60 months or more), drive lots of miles each year (which increases value depreciation), and roll over negative equity from a trade-in vehicle, then you will almost certainly be in a situation in which you will need gap insurance.

Are you in that situation now? Call your bank and get your current loan balance. Then go to Kelley Blue Book (www.kbb.com) and find the current value of your vehicle. Do you owe more than your vehicle is worth?

How and where do you buy gap insurance?

If you plan to lease your car, nearly all lease companies provide built-in gap coverage at no additional cost.

If you plan to buy, and suspect that you’ll need gap insurance, you can find it being offered from several different sources. First, your dealer may offer it, although the price could be higher than you might find it elsewhere. Your auto insurance company may offer it. Otherwise, do a web search and you’ll find a number of companies that offer it.

Gap insurance is not very expensive and it is well worth having to avoid financial disaster if your car is stolen or totaled in an accident.

An inexperienced car buyer might assume that an auto loan is nothing more than working out an affordable monthly payment amount with his dealer.

However, an affordable payment doesn’t make it a good deal. In fact, it can be a terrible deal. With more knowledge about how car loans work, the buyer can almost certainly get either a much lower payment or buy more car for the same payment.

Auto loans are based on a number of important factors, all of which affect the monthly payment amount. Let’s take a quick look at those factors now:

Loan amount – the amount you borrow, including negotiated car price, taxes, and any extras

Down payment – cash that you pay up front to reduce the amount of your loan, and reduce payment amount

Loan term – the length of your loan, in months

Interest rate – determines the amount of finance charges added to the cost of your car loan

With these four factors, it’s easy to calculate your monthly loan payment with an online auto loan calculator.

However, you are almost never in control of these factors. And one factor can relate to another in ways that might not be obvious. 

For example, the MSRP (sticker price) of a new car — or NADA (“blue book”) value of a used car — can determine the maximum loan term. Generally, the higher the price of the car and the more recent the model year, the longer the loan that will be allowed. New cars may be approved for as much as 84 months, whereas used cars that are 5-6 years old may only be approved for 36 months. This means you could actually have lower payments on a brand new car than on an older car in the same price range.

Your credit score greatly affects the interest rate you pay on your loan. A high score gets you a low interest rate, and low payments. For example, if your score is 700+ you might pay 5.99% APR or lower, or even qualify for a special 0% APR promotional rate.

However, if your score is, say, 675-699, you might expect to pay about 7.34% or more, depending on the loan company or bank you use.

If your credit score is 575-675, you are considered sub-prime and might expect to pay 12.74% or higher, if you can find a loan company to approve you. If your score is even lower, say, 525-574, you are sub-sub-prime and should expect to pay at least 20% interest rate, if you can find a lender.

Buyers with poor credit may be limited as to the amount borrowed, which means a hefty down payment may be required to reduce the loan amount.

Recent bankruptcies, car repossessions, payment delinquentcies, job history, home ownership, and late child support payments are also considered when seeking auto loan approvals.

If you don’t know your FICO credit score, you should. You can get your scores and credit reports directly from Fico Scores/Reports. Be sure to check your reports for mistakes, and get them fixed quickly.

Other factors will also affect your auto loan interest rate and approval prospects.

Your income must be sufficient to make your new car payment and pay other monthly bills you may have. This is often called your debt/income ratio. Auto loan companies typically don’t like to see more than 45% of your income going to pay your debts, including a new car payment.

Buyers with poor credit can usually be approved by getting a co-signer. A co-signer is someone who is willing to agree to take over responsibility for making loan payments if the primary borrower defaults, or is unable to pay. If the co-signer’s credit score is good and has a good income, the loan approval will be based on that person’s credit and the income/debts of both the primary and co-signer. The co-signer should understand that his credit score is affected by the additional debt, as is the primary borrower’s.

In summary, different banks, credit unions, and loan companies have different loan rates, rules, and approval procedures. Therefore, you should always shop around, particularly if you have poor credit. You don’t have to finance your car at the dealer from which you buy your car. His rates and terms are not always the best.