Buying a new car should be about enjoying your vehicle and the freedom that a new car offers, not about agonizing over the price tag. Budgeting and financial planning can help minimize the stress that often comes with a large-scale purchase.
If you’re buying a new car soon, read on to find out how to organize your finances so you can buy comfortably and with confidence.
1. Determine your car budget.
The first step in buying a new car is to find one you can reasonably afford. Here are a few questions to consider when budgeting for a new vehicle:
How much can I pay per month?
Go to the dealership with a maximum monthly payment in mind. Stay firm on an amount you can comfortably afford – even if the salesperson tries to suggest a higher number.
Also, remember to factor in automotive insurance. Most banks require full coverage auto insurance on leased vehicles and those bought with a loan, which will add to your monthly vehicle expense. The amount you can comfortably afford will depend on your financial situation, but try not to budget more than 10 or 15 percent of your net monthly income for automobile expenses.
When looking for a car, make sure you shop around for the best rate.
Which “add-ons” will I need when I buy the car?
When buying a car, there are a lot of other expenses that must be considered.
When discussing your car budget with a sales representative, make sure to ask for the total cost of the vehicle, which is also referred to as the price “out the door.” This number will be the cost of the car itself plus additional features and expenses such as warranties, sales tax, car title, and upgrades.
2. Save for a down payment or pay cash.
When you know how much you’d like to spend per month, it’s time to start saving if you haven’t already.
Many car dealerships advertise a “no money down” policy, which is an option for some, but it comes with several disadvantages. Buying a new car with no money down almost always means a high interest rate on the loan.
Additionally, since the value of a new vehicle depreciates as soon as it’s driven off the lot, a buyer who paid no money down is immediately “upside down” on the loan – which means the amount owed on the car is greater than the car is worth. Paying a large down payment (ideally 20 to 50 percent), can help you avoid being upside down on a car loan and can lower your interest rate and monthly payments.
An even better option is to save and purchase your car with cash. That can be tough for some people to do but if you can do this, it will free up the amount each month you would have for a car payment.
3. Budget for the future.
Once you’ve saved up for a down payment and identified your ideal monthly payment, set a long-term car budget. In the budget, account for monthly car and insurance payments for the life of the loan – as well as for fuel and maintenance costs.
Planning for auto expenses today can help you avoid headaches when dealing with a transmission replacement or punctured tire later on. Don’t get caught off guard. Budget for your vehicles!