Are you are a few weeks away from a car purchase, or are you ready to buy one right now? Whatever the case might be, if you’ve ever asked yourself “What car should I buy?” you are in the right place. Grab your coffee and buckle up while we help you navigate your car purchase ride!
Aside from purchasing a home, a car is one of the larger purchases you’ll make in life. And it’s so easy to get it wrong. Based on this, here are the key things we'll be covering in this post:
- Determine how much car can you really afford
- The best websites for car-buying research on a budget
- Qualify for a loan at the best rate
- New vs. preowned, which is better?
- Factoring insurance and maintenance costs into your budget
How much car can you really afford?
When thinking of what car you should get, it's important to put some real thought into the decision-making process and leave nothing to chance.
To figure out what you can really afford, here are two approaches to consider:
- Option A: Buy your car outright with cash upfront
- Option B: Financing your car through monthly car payments
Let's examine each option in more detail to help you make the right decision for your wallet.
Option A: Buying your car outright with cash upfront
If you really want to be ahead of the game, you can buy a car in cash upfront.
Sounds impossible, doesn’t it? Well, it's very doable. In a world where credit cards rule the day, paying cash for a car purchase seems highly unusual. But it can save you thousands of dollars and help you be more diligent in choosing a car that meets your key needs.
So how exactly can you achieve this?
For starters, you can purchase a cheap pre-owned car. If you save $2,000 over a few months, you could purchase a cheap car that you can use while you save up for the car you really want.
For the next few months, take any money that would have gone towards a car payment and diligently save that in a separate account dedicated to your next car purchase.
In a matter of a few months, you can sell your current car and add the proceeds to your savings for the car you really want and voila! You’ll have the car of your dreams, paid for in cash!
Option B: Financing your car through monthly payments
As mentioned, one way to afford a car is to make monthly payments over an extended period of time. Experts have different opinions on what that period of time should be, but here at Clever Girl Finance, we lean towards as short a time frame as possible. This approach means you focus on paying off the car quickly and in turn, this frees up funds to pursue your financial goals.
Here's how to determine the final car purchase price you can comfortably afford:
- First, figure out how much you can afford to pay each month in car payments based on your monthly budget
- Next, explore loan financing options available to you based on the payment you can comfortably afford
- What can I "really" afford to pay each month for my car?
Conventional wisdom on this number differs, however, I'd recommend that no more than 10% of your net monthly income after tax and other deductions, should go towards a monthly car payment.
This decision should be based on your take-home pay as opposed to your gross pay to ensure that you’re working within a budget you can truly afford.
For example, if you have $2,500 left after taxes from your total monthly income, then your car payment should be no more than $250 each month.
To be clear, based on your gross pay, it might look like you can afford higher payments. However, this may not be in your best interest. You don’t want to end up paying too much each month especially as the value of cars typically decline over time.
You’ll also want to take into consideration the duration of the car loan and how much in interest you'll be paying over the life of the loan. Ideally, your goal should be to pay off your car loan as quickly as possible since it's tied to a depreciating asset.
- Factors that determine your monthly car payment
As mentioned above, figuring out your monthly car payment is a great first step in your journey towards buying a car. However, it doesn’t end there.
The actual amount you can borrow under a car loan will be determined by additional factors which will need your careful consideration.
- The loan term: The maximum number of months you have to pay off your car loan. Shorter loan terms typically mean higher monthly payments.
- The interest rate: This is what it's going to cost you to borrow the money. If you want to get the best interest rate possible, you’ll want to ensure your credit score is in good condition. The higher your score, the less risky lenders will deem you to be and the less you’ll pay in interest.
- The condition of the car: f you’re buying a year old vehicle, be prepared to spend more in total costs than if you’re buying an older vehicle. This, in turn, means higher payments.
With both options, consider the total final price you'll be paying for the car
A host of factors go into the final price you end up paying. For example, you’ll need to factor in taxes and some not-so-obvious fees such as registration and documentation fees. These vary according to state so a good estimate would be to add 10% to the price of the vehicle.
Additionally, if you trade in your existing car, you’ll likely lower the final purchase price.
The best websites for car-buying research on a budget
In this digital age, you can thankfully say goodbye to making trips to a car dealership where you’ll be inundated with slick offers by a salesman.
If you really want to understand and compare the benefits of different cars, then there are plenty of opportunities to do so online.
That being said, not all dealerships are filled with sketchy salesmen and a key benefit to visiting one in person, is that you'll be able to negotiate prices. This is not an option when browsing online as the prices are generally fixed.
However, car shopping online does have its advantages including the ability to search at your own pace and to sometimes find lower prices than an in-person trade.
If you’re looking to go down the online route, here are some sites to help you get started:
For the person on the go, Autolist is the perfect search tool for mobile. The software scans multiple other sites and dealerships and it will show you useful information such as how many days the car has been on the market, % of similar listings and historic price changes on their mobile app. You will also see basic specs for the vehicle as well as contact info for the seller.
Car Gurus is an excellent resource if you’re shopping on a budget. The site sorts cars by listing the best deals first (based on the dealer’s reviews and vehicle data). Each used car also has a “deal rating” letting you know if the car is a great deal or if it's overpriced. Additionally, the site will pull up valuable information such as prior accidents on the car as well as it’s market value.
Autotrader is the industry go-to when it comes to car shopping online. While it offers basic search features such as filters by price and model, it goes the extra mile by letting you drill down on other more advanced specifications. It also has a calculator that helps you figure out how much your payments would come to for each listing.
If you’re a novice and looking for a simple site, Cars Direct is a great place to start. The site focuses on the basics, letting you screen used cars by model, price, and body style. The site also lets you save a model you like in order to review it later.
Qualifying for a loan at the best rate
Once you’ve narrowed down your car choice, you’ll likely start considering your financing options.
It's a good idea to get pre-approved for an auto loan before heading out to a dealership. This comes with the significant benefit that cannot be overlooked - You'll be able to negotiate a better sales price.
To get a pre-approval, you have a few credible options:
- Credit Union pre-approval
Credit unions are often a great place to get a car loan. A credit union is a not for profit member cooperative whose main goal is to help its members to achieve their financial goals at competitive rates. Typically, credit unions offer lower interest rates and fees than a commercial bank would when it comes to loans. Lending done through a bank or a credit union is sometimes referred to as direct lending.
A credit union could also be more consumer-friendly if you have a lower credit score than a regular bank. This is because banks follow a strict criterion when issuing debt whereas a credit union is much more interactive and takes a more one-on-one approach with a borrower.
Typically, a credit union will ask for:
- Contact information of the borrower (that's you!)
- Your current employment, housing, and income information
- Trade-in information (title or loan information, registration, etc.) for an existing car
- The expected financing amount (including the purchase price, taxes, title, and warranty minus any down payment)
- The requested loan term
Since most applications today are done electronically, you can expect to receive a decision on your loan within minutes. After you've been approved, a check will be mailed to you or can be collected from the credit union branch.
Once you’re ready to buy the car, you’ll need to take the check to the car dealer as evidence of your pre-approval. You'll want to ensure that the check is completed and signed.
Finally, after you've purchased your car, your credit union may ask you to send a copy of the title to their office within a few weeks of finalizing the purchase.
- Car dealership loan
Another alternative is to get financing through a dealership. Under this arrangement, you would enter into an agreement with the dealership where you purchase the car from them and, over time, pay off the amount financed plus a finance charge.
Sometimes the dealer will keep and manage the contract, but, more often than not, the dealer sells this contract to a bank, a credit union or a finance company that will service the account and collects your monthly payments.
The benefits of dealership financing include:
- Ease and convenience: If you’re already shopping for a car at the dealership, you’ll likely want to finalize everything associated with the purchase within that same location.
- Multiple options: Dealerships will typically have a range of financing options available to you based on the number of relationships they have with banks and financing companies.
- Special offers: Dealerships often have special offers run by the car manufacturer in the form of lower financing rates or certain incentives associated with a payment. Typically, special offers are reserved for certain vehicles.
Whatever financing option you choose, shop around and take your time. You certainly won’t regret it.
A note on secured vs. unsecured auto loans
Car loans can either be secured or unsecured. If a car loan is secured, the contract will usually contain a lien or a claim to the borrower’s assets. The type of assets included depend on the contract, but a lot of the time, a lien is put on the car being purchased. If you default on your loan, the car will get repossessed. Liens can also come in the form of other cars or a home.
Unsecured auto loans, on the other hand, do not have any assets attached to them and will typically come with a higher interest rate to account for the additional risk a lender must take on.
Should I buy a new or pre-owned car?
Buying a brand-new car is exciting! New car smell, zero damage and the freedom to choose and customize your car how you please.
However, the reality is that purchasing a brand-new car can cost you thousands of more dollars than a used car. Here are some key considerations:
- Purchase price: According to Kelley Blue Book, a new car costs $37,000 on average whereas a used car costs $20,000 on average. This cost differential doesn’t only affect the purchase price – it also affects financing and insurance.
- Depreciation: A key deterrent to buying a new car is the fact that car depreciation significantly alters the value of every car. Conventional wisdom states that a car depreciates by 20% as soon as you buy it and that with moderate use, that number could increase to 30% by the end of the first year.
- Maintenance costs: As alluded to earlier, new and more expensive cars often come with a higher monthly payment and higher insurance premiums. An older car will be cheaper to replace for an insurance company in the event of an accident; which is not the case with a new car. Other costs such as registry renewal are also lower for used cars vs. new cars.
- Reliability: Until recently, buying a new car guaranteed that you received quality consistent with the brand you purchased. However, today, with increased competition in the market, car brands have significantly stepped up their offering to ensure that they are at par with top brands. Reliability is now less aligned to a brand and more tied to the upkeep of the previous owner.
All in all, if you’re set on making a car purchase, strongly consider a pre-owned vehicle. Not only can it save you thousands of dollars, but it can also help you achieve your other financial goals.
Factoring insurance and maintenance costs into your budget
Auto insurance coverage: This can feel like a pain in the neck to manage. Premiums can feel too high or you may have an excellent driving record and feel confident that only need the most basic coverage. However, life happens and if it does, you’ll be glad you had the right kind of auto insurance.
Even if you drive an old vehicle, auto insurance coverage is essential because it could save you the often-unexpected cost of replacing a vehicle.
It's important to keep in mind that the cost of insurance can vary based on:
- The safety record of your car's make and model
- The cost of the car and it's associated parts
Maintenance costs: When putting together a budget for a car, many people often forget to include maintenance costs.
As the saying goes “out of sight, out of mind”. What ends up happening is that as you neglect to budget your car maintenance costs, you’ll likely forget to run basic maintenance on it for extended periods of time. Emergencies then arise where you can find yourself paying more for huge repairs that regular maintenance could have handled.
If you’re wondering what the best way to handle these costs is, creating a sinking fund in your budget for car maintenance is a reasonable way to manage these costs. On average, you’ll want to budget about $75 for car maintenance each month which can help with new tires, tune-ups or replacement of a side mirror.
When you’re considering what car you should get, you’ll want to conduct your due diligence as much as possible. It may take a bit of time upfront, but the savings could really drive your overall long-term goals forward.