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How Much Is It Going To Cost Me?
To get an idea of what type of vehicle to look for, start by determining what you can afford. This is a good time, to be honest with yourself about what you can and should spend on a new vehicle for you.
How Much Should You Budget?
There are a range of suggested budgets for how much to spend on a car, so use these as general guidelines.
Generally, financial experts recommend spending between 10 and 20 percent of your monthly income on your vehicle. Some say it should be before taxes while others say calculate your budget based on your net monthly payment. Others suggest that you look for a vehicle that costs about half of your annual take-home pay.
When you are calculating your budget for a new vehicle for yourself, remember to take into account two additional monthly costs that are likely to change from your current vehicle: insurance and fuel.
Insurance
Insurance will be increased because your new vehicle is worth more than the one you are replacing. Depending on your new vehicle, it could increase a lot. A general rule of thumb is, the faster, rarer, and more exciting the car brand is to drive, the more expensive it will be to insure. So a basic Chrysler Pacifica minivan will cost considerably less to insure than a Porsche 911 Turbo S.
High-end sports cars with large engines are typically the most expensive to insure. Not only are they expensive in the first place, but statistically they are more likely to crash. Sorry for speed buffs, but it’s true.
No matter what you end up buying, expect it to come with a higher insurance bill than what you are paying now.
Your Fuel Costs Could Change Too.
As mentioned below, the EPA has a very useful free tool here that allows you to look up the fuel economy of any car since 1984. Use it to compare your old car to your new car, or to compare various models you are considering.
Where Does The Money Come From?
Sadly, cars are not free. You need to pay for them, and since they are probably the second most expensive thing you will buy (houses are # 1), you will need help finding the money.
You have two options: lease or buy. Regardless of your source, we highly recommend that you have your financing figured out before setting foot in a dealership. Sometimes a dealer can offer you better financing terms than anywhere else, but many times you will get better interest rates elsewhere. If you go to a dealership and you have already figured out the financing, you can compare it with what the dealer is offering.
Buy
If you are going to buy the car, you are going to need to finance the purchase.
Depending on the model or time of year, the carmaker itself (not the dealer) may offer great financing terms like interest rates between 0% – basically free money – and 1.9%. That is a smart choice.
You can also check vehicle loans at your bank or credit union that may have better interest rates than a bank.
Being pre-approved for a loan could also be a good idea so you know what you can afford.
Remember that when you’re trying to figure out how much to spend on a down payment, many experts say it’s smart to budget for 10 to 20 percent of the cost of the vehicle.
But no matter where you get your loan, be smart about its duration. The average price of new vehicles has never been higher (currently around $ 33,000), but to pay for it more and more consumers are taking out loans of up to 72 – 96 months.
This can end up costing you a lot in interest, and it probably means you’ll owe more on the car than it will be worth for the life of the loan. This could upset you if the car suffers a total loss or if you are forced to sell it for an unforeseen reason. It also means that your car will be old by the time it is fully paid for.
Leasing
If you really want a car that will save you a long loan, consider leasing. This pays more for your monthly payment, and most leases are 24 to 36 months in length so you don’t get stuck with a car for a long period of time.
This is also very useful if you expect your car’s needs to change in two to three years. Possibly you will be moving to another city at that time, or you are planning to have children, or your children are moving.
The downside to leasing is that you can’t build equity on a vehicle like you would if you bought it. It is the same as renting a house versus buying a house, every rent check you write will never be seen again.
Leases also limit the number of miles you can drive annually and charge you for each mile you are overdue (although you can negotiate this early in the lease if you are sure you will overshoot).
When Is The Best Time To Buy?
There are good times during the calendar year to buy a car and times not so good. Not everyone is in control when they have to go buy a car again: your old car bottoms out, takes a total loss, or your lease expires.
But, if you can control when to buy, there are some times when you’ll have better luck getting a good deal on a new or used car from a dealer. Buying privately is generally the same throughout the year.
- At the end of the model year. This is around August and September. This is when the current year’s vehicle models are about to come out and dealerships are starting to get next year’s models. It’s the time when car dealers and manufacturers are feeling the pressure to get rid of old models while they can.
- At the end of the calendar year. We’ve all seen the commercials around the holidays: a husband or wife takes their partner to a snowy driveway where there’s a new car with a big red bow on it. While that scenario may be over the top, the notion of getting a new car at the time is not. At the end of the calendar year, car dealers and automakers are willing to ditch whatever they can in order to get the best sales year possible. And those 2018 models that were not sold in August and September are really making dealers nervous; as soon as the new year comes the cars will be old, and no dealer will want to keep them then.
- Black Friday and long weekends. Again with the commercials… we’ve all seen dealerships yelling on TV about the offers they are having to INSERT HOLIDAY HERE. But there is a truth in what they are saying; They wouldn’t be spending money on ads in the first place if they didn’t want to sell some cars. Automakers get involved in this too, often offering low-rate financing deals or leasing deals.
- Not a good time? Spring is not when you want to buy a car. Many people have tax refund checks and are looking to spend it, and dealerships and automakers know this so they are less willing to offer deals. Additionally, spring is in the middle of big holidays like President’s Day and then Memorial Day that are traditionally good times for deals.