By WebMaster RefiJet () - October 30, 2018
The first question you really need to ask yourself is whether or not you really “need” a new car as opposed to just “wanting” it. The difference between “need” and “want” helps determine how much you are willing to spend. As an example, you might “need” a way to get back and forth to work. The leather interior and upgraded stereo are more likely something that you “want”. Additionally, if you already have a working vehicle that you’ve kept in good condition, you might not “need” a new car.
A car is generally a depreciating asset, which means its value goes down over time. The biggest amount of depreciation takes place in the first two or three years of a car’s life. In fact, an average car will lose approximately 20% of its value in the first year and another 15% of its original value over years two and three. Keep the value of the vehicle (and how much it has depreciated) in mind as you think about whether it is better to get a new car or if it is better to budget for maintenance and repairs (and whatever is left on your loan payments).
Of course, if your car loan is paid off, then making a loan payment isn’t part of the equation! This doesn’t necessarily mean that you must go out and get a new car. If you’ve kept the car in good condition, kept up on its maintenance and have reasonably low mileage (for its age), why not consider delaying it a little and saving the payments you would have made?
If you need the car urgently, you don’t have much flexibility. This means that any cash you’ll need up front (for example, a down payment) will need to be available quickly as well. If, however, the purchase isn’t urgent, you’ll have more time to save which can either make the savings process less difficult or allow you to save more prior to purchasing the car. The more you can pay up front, the lower your payments are likely to be.
Additionally, you might be able to wait for dealer incentives (cash back, promotional interest rates, etc.) to become available as well. It is important to think about the timing rationally. It is easy to get excited about getting a new car, but it is important to be realistic about what you can afford and when you will be able to afford it. In other words, choosing the timing of buying the car can affect the total cost of buying the car.
It depends on the type of vehicle you are looking for. A full-size SUV will cost much more than a small economy sedan, of course. The analysts at Kelley Blue Book today reported the estimated average transaction price for light vehicles in the United States was $35,742 in September, 2018 which is 2% higher than September, 2017.
The days of needing to walk into the dealership and speak to a salesperson are behind us. Of course, you can always go talk with a salesperson if that is your thing.
There are many websites that offer a wealth of information about car pricing, costs, dealer promotions and incentives, what other people are paying for the same cars, what the car should cost in your geographic area, and what options are available for the car.
Here’s a short list (there are many others as well).
• kbb.com (Kelley Blue Book)
There are some basic things you will definitely want to understand.
Dealer Invoice Price – This is the dealer’s cost for the vehicle only and doesn’t include any of the dealer’s costs for advertising, selling, preparing, displaying or financing the vehicle.
MSRP/Sticker Price (Manufacturer’s Suggested Retail Price) – This is the “list” price and usually will not be the price you should pay for the vehicle.
Fair Purchase Price/Market Value – This is what people in your area are paying for the same vehicle (on average). It doesn’t mean that you can’t get a lower price. Always remember that most things are negotiable.
Most people are going to finance their car in some way which means that you’re going to likely have monthly payments. Given that every individual’s financial situation is different, you’re going to need to pick a budget that works for you based on what you can afford. Remember, if you can’t afford it right now and it is not a “need,” it might be worth taking a little bit of time to save enough money to make it affordable. There are also other short-term options (like refinancing your current vehicle) that could help you with your budget.
A common budgeting method is the 50/30/20 budget, which allocates 50% of your monthly income to needs, 30% to wants and 20% to savings. Additionally, some experts say that the total of all of your car-related expenses shouldn’t exceed 20% of your take-home pay.
A good rule of thumb is that it is better to make at least a 20% down payment. The smaller the down payment you make on the car, the greater the risk of your loan becoming “upside down.” Being “upside down” means you owe more on the car than the car is actually worth.
Ultimately, the goal is to get to your desired payment by determining how much you are comfortable borrowing.
One of the ways you can reduce the amount you need to borrow is by selling your current car. You can trade it in, which is selling it to the dealership as part of the new vehicle purchase or you can sell it or you can sell it directly to a private party. Trading it in is generally quicker and easier but will likely sell for a lower price (sometime significantly lower) than by selling it privately. A trade-in also happens at the same time as the new purchase, so you don’t have to worry about being without your old car while waiting for the new car to arrive.
The biggest factors in determining the value of your vehicle are the model, age, mileage and condition. To find out how much your car might be worth, you can use many of the same resources you used to research the new vehicle. Edmunds.com, kbb.com and NadaGuides.com are a good place to start.
The price of the car isn’t the only “car-related expense” that you need to budget for. You’ll need to budget for insurance, finance charges, registration, taxes, fuel costs, routine maintenance (new tires, oil changes, windshield wiper replacements, etc.) and repair bills.
The average cost of insurance is currently $1,427 per year. That price is 6% higher than last year. This cost varies significantly based on several factors .
• Geography: The city and state where you live and drive will impact your rates.
• Vehicle: The type of car you purchase will significantly impact rates. Typically, high-performance/sports cars, turbocharged/supercharged vehicles, cars with bigger engines and four-wheel drive vehicles can cause insurance rates to increase. Other variables like the new car cost, the technology, the safety record and even the likelihood of the car being stolen will affect insurance rates. You can get some good information about vehicle theft rates at nhtsa.gov .
• You: Your age, driving history (accidents, tickets, DUIs, etc.), marital status, and even your education all contribute to your insurance rates.
• Credit Score: The better your credit score, the more likely you will get lower insurance rates.
If you’re buying a new car, your warranty should cover repairing major defects for around three years. It won’t cover repairs from accidents or negligence and it most likely won’t cover maintenance, like oil changes, a new battery, new tires or windshield wiper replacements. With most used cars, you won’t have a warranty and will need to budget for potential repair costs unless you also purchase an Extended Service Contract (ESC), which helps take care of unexpected repairs.
Additionally, if you are taking a loan to purchase the vehicle (new or used), you might also want to purchase Guaranteed Asset Protection (GAP) which minimizes financial risk if the vehicle is in an accident or stolen, covering the difference between what is owed on the vehicle and what it is worth.
Products like GAP Insurance and ESC can help protect your large financial purchase and potentially limit your risk and exposure if something goes wrong.
With the low cost of fuel as recently as 2 years ago, fuel efficiency became less important to consumers. Unfortunately, the cost of fuel didn’t stay low. Gas prices are up to $2.93/gal (for the week of August 13, 2018). That is an increase of 17% in the last year (from $2.49/gal) and a 49% increase from its low of $1.83/gal in February of 2016.
With gas prices at almost $3/gallon, you can save around $1,000/year in gas (based on 15,000 miles/year) by choosing a car that gets 35 mpg rather than an SUV that gets 20 mpg.
When you are prepared and understand the factors that affect the overall cost of buying a car, you can better manage the car deal as well as the overall financial situation.
For Part 2, we are going to make sure you’ve got enough money saved up for your big purchase. We’ll also give you some suggestions for how you can save enough if you don’t already have it.
Finally, in Part 3, we are going to discuss the different way you can pay for the vehicle and the ways to best leverage the lowest price.
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