Your car has definitely seen better days. At this point, you’ve taken it for repairs so many times that you’ve become friends with the mechanic. You no longer feel confident taking your car out for long drives either. It’s making a weird noise, and you’re afraid it will leave you stranded in the middle of nowhere.
Unless you intend to drive it until the wheels fall off, you’ve probably been thinking about getting a new one. But that’s easier said than done. Cars aren’t cheap. And it’s not like you’re going shopping for a new pair of jeans. It’s a long process with lots of paperwork. Not exactly something you look forward to. At the same time, you know it has to be done. So how do you get started? Well, you can’t just go to a dealership, point to a car, and say, “I’ll take that one.” (But wouldn’t that be nice.)
No, you start by considering a few important things.
You first have to think about your lifestyle. You’re spending all this money on a car that you’ll be driving for the next few years, so you want to make sure you’re getting the car you need. So what is it that you need? Are you single? Do you have kids? Do you plan on having kids in the next few years? Do you mostly use your car to commute to work? How long is your commute?
If you’re single, you can get yourself that nice sporty little car you’ve been dreaming of. On the other hand, if you have a family, you’ll probably need an SUV, so there’s room for a stroller, car seat, and all those nappy bags. If you have several kids that need to go to soccer practice, maybe you need a minivan.
Then you need to think about the terrain. If your commute is mostly long-distance highway driving, it’s better to look for a car with smooth handling, and that doesn’t use a lot of fuel. However, if you do a lot of off-road driving, maybe you could look for new Ford F 150 dealers.
Now that you know the kind of car you need let’s think about what you can afford. Figure out your budget before you go to the dealership. Car dealers are professionals who get to practice their negotiation skills every day. You, on the other hand, only buy a car every few years, so you’re an amateur. It’s easy to get carried away.
Can you buy a car full-price, or do you need to apply for financing? In that case, how much can you afford to set aside for the down payment?
You already know that you can get financing directly through the dealer, but it never hurts to look for a car loan on your own. This way, you can get a better idea of how much you can get, the average interest rate, and how much you can afford to spend on a car.
Don’t forget to factor in insurance, servicing, tires, and fuel. The amount you spend on your car – this means car loan payments and everything else we mentioned – should not exceed 20% of your monthly income. It’s up to you, but if you get a car, you can barely afford, if anything goes wrong like a major home repair or medical emergency, you’re going to have a hard time maintaining your financial stability.
New or Used
And now for the final point: should you get new or used? Buying a used car makes more sense if you’re on a tight budget. And even if you can afford a brand new car, there’s always the problem with depreciation. As soon as you finish the paperwork and you can drive the car off into the sunset, it will have already lost about 20% of its value. That’s 20% of the money you worked hard for and spent on this car. If you sell it after three years, you’ll get about half of what you paid.
But if you buy a three-year-old car and sell it after another three years, you should get about two-thirds of what you paid, depending on how well you took care of it. Still, keep in mind that we’re generalizing, and not all cars depreciate at the same rate. For specific makes and models, you can find online resources that can estimate the depreciation rate.
Buying a new car also comes with some benefits. Since there’s no wear and tear to worry about, the process is a lot less stressful. It’s also easier to compare offers from dealerships because it’s the same brand new car. The difference in price doesn’t depend on mileage or how diligent the previous owner was.
Getting financing for a new car can also be easier since manufacturers know that buying used has some undeniable financial benefits, so they offer lower interest rates to attract customers.