A car is often one of the first “big purchases” we make as adults. While you may buy your first car used
(perhaps with cash or with help from your parents), there will likely come a time when you’re ready to buy a more expensive vehicle. Unless you have a large cash
reserve on hand, chances are you will take out a car loan
to help manage the expense. Having a good understanding of the car financing process and associated costs can help ease the stress of searching for a new vehicle.
Here are some tips to help you make a financially smart decision:
Create a Budget
The first step in purchasing a vehicle is to figure out how much you can afford
to spend on a new car. In order to do so, you should create a budget and get a sense of your current expenses. In most cases, you’ll pay for your car with an initial down payment
and finance the remainder of the cost with a car loan which you’ll pay back through monthly payments.
• Down Payment. While your down payment will likely come out of your savings account, you should make sure that it won’t deplete your savings. You want to leave enough funds on hand to cover emergencies and other unforeseen expenses. It is typically recommended that a down payment for a car should be at least 20% of the total price. Getting a sense of how much money you have for a down payment can help you determine what price range you should consider. For example, if you can put down $4,000, you could potentially look for cars with a price tag of around $20,000 ($4,000 divided by 20% = $20,000 total price). In this case, you’d be putting down $4,000 and financing the remaining $16,000. Ultimately though, your budget should determine how much you can realistically afford in terms of an ongoing monthly payment.
• Monthly Payment. In most cases, your monthly car payment will include both principal (your loan amount) as well as interest. When taking out a car loan, it can be worthwhile to shop around for financing options to ensure you’re getting the lowest possible interest rate. Your interest rate can vary depending on your credit score and whether or not you have a co-signer. The length of your car loan will also impact the monthly payment. Typically, the longer your loan term the lower the payment. Keep in mind though that a longer car loan term could result in you paying more interest over the life of the loan.
• Car Insurance. Be sure to account for your monthly car insurance costs as well. Before you drive a car off a dealer’s lot, you’ll need to have adequate insurance coverage that meets the laws of your state. Both Massachusetts and Rhode Island have minimum car insurance requirements so getting a sense of what kind of coverage you’ll need, and shopping around for some estimates will be helpful when determining how much car you can afford.
• Other Car-Related Expenses. As mentioned previously, unexpected expenses can come out of nowhere, and this can be especially true when it comes to cars. When deciding which car to buy, be sure to review the vehicle’s warranty and any included maintenance. Understand which kinds of repairs will be covered, and which ones won’t. While comprehensive car insurance may pay for vehicle repairs caused by an accident or natural disaster, it won’t cover expenses caused by “wear and tear” like new tires, air filter replacements, brake repairs, or new windshield wipers. In addition to making sure you have enough money to cover your monthly car payment and car insurance costs, you’ll want ensure you have some funds set aside for car repairs and routine maintenance.
There are many things that impact the cost of a vehicle. Here are some things to consider once you have an idea of how much car you can afford:
• New vs. Used. You should consider the pros and cons of buying a brand-new vehicle versus a used or certified pre-owned car. New cars can give you more peace of mind that you won't have maintenance problems for a while, but used cars generally protect you from fast depreciation. Ultimately, your decision may depend on whether you’re looking for a specific model, or what current inventory is like in your area. Sometimes, dealer incentives can tip the scale towards buying new, and other times a surplus of used cars may drive prices so low you can’t refuse a pre-owned vehicle. Keep in mind that a car is considered “used” after just one owner so you may be able to find some good deals on a low-mileage vehicle that’s only a year or two old. Exploring both new and used vehicles can help you make the decision that’s right for you.
• Car Features and Extras. Once you have put together a budget for your new car purchase, figure out what features are important to you. Evaluate which ones are “must-haves” and which are flexible. A fancy navigation and sound system may be nice to have in your new car, but you prefer to forgo them for a lower monthly car payment. Even if you go into the car buying process knowing which features you want, it’s common to have the salesperson try to sell you on upgrades. These upsells can range from cosmetic improvements to entertainment packages and safety features, and they’ll all add to the price of your car. If you’ve done your research ahead of time, you’ll be more prepared to say no to upgrades you don’t need.
• Extended Warranties. Another thing a car dealership will likely offer is an extended warranty. Most cars come with a manufacturer’s warranty that protects your purchase against major maintenance issues for a specific period of time. An extended warranty may extend the coverage period of the manufacturer’s warranty or it may cover additional maintenance services. Extended warranties are usually considered a bad deal because they’re priced in a way that ensures the company offering it makes a profit. In other words, they don’t expect that you’ll need all of the maintenance and repairs you’re paying up front for. Unfortunately, if you pay for the extended warranty but never utilize it, it can be a waste of money. Before agreeing to any kind of extended warranty, be sure to review the manufacturer’s warranty in detail, as it’s very likely it will provide adequate peace of mind for you.
If you need to finance your car purchase, you typically will have the option of doing so through the dealer or finding your own lender. Most banks and credit unions offer car loans, so shopping around can help you secure the best loan terms. Keep in mind though that dealer incentives can sometimes lower the ticket price of your car if you use their financing. One approach is to get a preapproval from an outside lender before you begin car shopping, and then see if the dealership can beat that offer. Going into a car buying experience prepared will also help to alleviate some of the pressure. It’s important to never let the dealership rush you or talk you into an offer you are not completely comfortable with.
If you have a low credit score or a lack of credit history you may have trouble qualifying for a decent interest rate. If that's the case, consider adding a co-signer to the loan to help you get better loan terms. Most often, co-signers are a parent, relative, or spouse. Before entering into this type of agreement it is important for you and the co-signer to understand that they will become legally responsible for the loan if you default on it. If co-signing is not a good option for you, it may be wise to purchase a lower priced vehicle and then sell it and upgrade down the road when you're financially ready to qualify for a better loan.
Make Your Purchase
Buying your first car can be a challenging process that requires preparation in terms of the car search as well as financing options. Doing your homework is the best way to ensure you don’t get overwhelmed by the car buying experience. Be sure to fully understand your auto financing options, including interest rates and loan terms, so you will be completely comfortable with your purchase. If you’re interested in purchasing a car in MA or RI and need help determining how much car you can afford or which type of auto loan is right for you, don’t hesitate to contact us today.