Cars are expensive and they start to decrease in value the minute you drive them off the lot. However, that doesn’t mean that having a car is a luxury that should be afforded only to the wealthy. For many people, especially those who live in areas with little public transportation, cars are essential for commuting to and from work, driving children to and from school, doing errands, and even taking vacations. If you’re in the market for a new vehicle, there are a few things you should consider before heading to the dealership.
Understand that new cars lose value faster than used cars.
All vehicles are depreciating assets, meaning that they lose value over time. New cars depreciate much faster than used cars – according to Kelley Blue Book, most vehicles lose 20% of their value within the first year of ownership. After four more years, a car’s value is down a total of 60% from the original purchase price – depreciating approximately 10% each year after the first. Purchasing a car that is at least one year old, then, can prevent that initial drop in value and significantly decrease the purchase price, saving you money.
When you commit to a car, you’re not just committing to the purchase price.
The cost of a car is more than the price listed on the window sticker. In addition to the price of the vehicle itself, you will also be liable for upfront taxes and fees, registration and state inspection costs, the ongoing cost of car insurance, and the costs associated with routine maintenance and filling up your tank. Further, if you decide to finance your vehicle – and most people do – you will have the added cost of interest rolled in to your monthly payment.
So, what can you afford?
Look at your monthly spending plan and consider what you are currently paying for insurance, gas, and maintenance each month. If you end up buying a newer vehicle than what you currently drive, you can expect your insurance premiums to increase – unless your new car comes with substantial safety improvements. If you’re looking at an electric vehicle, you need to consider how you will pay to charge the car and factor in those utility costs (but you can drop the gas charges). Registration and inspection fees are generally imposed each year or every two years, and should also be considered when determining the affordability of a car. Once you have an idea of how your current monthly car expenses will change with a new vehicle, look at the actual sticker price of the car and start doing the math. According to Bankrate, the average monthly payment for a new car is $726, and a used car is $533. Can you afford those costs?
Know what it means to finance.
Many people end up financing their purchase when they are in the market for a new car. However, financing can be expensive and increase your monthly payment to more than your budget allows. Vehicle loan amounts vary based on:
- The purchase price of the vehicle
- Your cash down payment or the trade-in value of your old car
- Your credit score
- Your interest rate (which is also based on your credit score and history)
- Add-ons purchased with the vehicle (do you actually need that warranty?)
- The length of the loan
One effective way to decrease your monthly payment is to extend the length of the loan. However, a longer loan means that you’ll be paying interest for a longer period of time, increasing how much you pay for the vehicle. Given the depreciation rate, many financial experts recommend limiting your loan length to a maximum of five years. Further, the bank may impose restrictions on your new car while the loan is being repaid – make sure to ask about these. Some lenders won’t allow you to relocate your car to a new state or overseas (which could be problematic if you receive PCS orders). If you’re required to move, you may not want to have to go through the hassle of selling your car and buying a new one (especially when you’re almost guaranteed to lose money in the process).
Another way to decrease your monthly payment is to increase your credit score. Check your credit score prior to starting the car buying process. If you’re close to being in the next tier of score (e.g., you’re on the cusp between Fair and Good), it may be wise to work on making on-time payments and paying your balance in full for a few months to boost your score and secure a lower interest rate on your vehicle loan.
Note: While the Military Lending Act limits the fees that can be charged to servicemembers, it does not apply to vehicle purchases where the car being purchased acts as collateral for the loan. There are predatory lenders that increase interest rates purely to drive a higher profit. Ask around at your base (or check the base’s website) to see if there are any blacklisted dealerships that you should avoid when making your purchase.
Not all cars are practical for your personal situation.
Consider how you will use your new vehicle.
Will you be commuting? How long is your commute? A hybrid vehicle or something with good gas mileage may be a better purchase if you’ll be spending time on the highway every day – a lifted pickup truck may look cool but is going to cost you more in gas money if you’re regularly driving long distances.
What is practical for your current location? Does it snow heavily in the winter where you live? Do you like to go camping on the weekends and want off-roading capabilities? If so, a vehicle with four-wheel drive might be a good investment. Is your driving limited to well-paved streets in the city? Four-wheel drive may not be necessary.
Most importantly, what is practical for your family? If you have children or are planning to have children in the next few years, a two-door vehicle is going to make driving with your kids pretty uncomfortable. If your side hobby is making handmade furniture, you’re probably going to want a vehicle with some trunk space. Think about how you will use your new car day-to-day when determining what make and model may be right for you.
You don’t have to buy a car on your first trip to the dealership.
When you start visiting dealerships, you need to be okay with walking away. The sales representatives you will encounter at dealerships may use pushy or aggressive sales tactics, and that can lead buyers to make quick decisions. When you’re ready to start test driving cars, bring a friend or family member with you, and walk away if you get too much pressure to buy. It’s okay to say “no” and bring your business back another day or try another dealership. Buying a car is a big investment, and you need to make the right choice for you.
When you’re thinking about buying a car, the first step is to evaluate your spending plan to determine what you can afford. From there, consider the practicalities of how you will use the car and whether you actually need a brand new (and therefore more expensive) vehicle. If you have questions about creating a spending plan, our Educators can be reached at 888-298-4442.