Car

Buying your first car is one of the most, if not the most, exciting things to happen before turning twenty-one. A car brings freedom, excitement and lots of responsibility.  Before making your first purchase there are many factors to consider to avoid trouble down the road.

The First Question: How Much Can You Afford?

The first questions to ask when considering buying a car is how much can you afford.  This is a crucial question to put some time and effort into answering.

The question of how much you can afford is extremely important. Auto loans are typically around five years, though some are creeping up towards six or more. This will be a long term financial commitment you are making, so don't bite off more than you can afford. Check out our free auto loan calculator to get an idea of how much car you can afford.

Besides the cost of the actual auto loan, consider the other expenses that come with a vehicle such as gas and maintenance. Something as simple sounding as gas can make a big difference.  Will your car accept regular fuel or will it need premium?  That could be a $0.50/gallon difference every time you fuel up!

So how much should you spend on your new wheels?  The answer will be different for everyone, but a general rule is that your car payment + insurance for each month should not exceed 10% of your gross income (your pay before deducting taxes).

At this point you should also consider your down payment.  This will be an amount you put down when you purchase the vehicle and today it is usually around 10%. If you can afford to do more that is great! Larger down payments do help you over the long run.  You will pay less each month for your car and less interest overall. You may even receive a lower interest rate with an increased down payment. With that said, no matter how much you decide to put down, don't skip out on other commitments you have made to saving money so you can have a larger down payment.

So you figured out how much you can reasonably afford and have narrowed down the options on cars you would like to buy. Now it's time to prove to the financing department you can actually afford the car.

If you are young with limited or no credit history this may be tough. You might be required to make a larger down payment and/or have a co-signer.  A co-signer will be placing a lot of trust in you to make payments since, if you default on your loan, they will be held responsible.  That said, a co-signer with an extended good credit history can really help.  Lenders look to your credit report to determine your risk and a limited credit history makes this difficult.

When you go to a dealership they will most likely have their own financing department that is more than happy to process your loan. Don't think that this is your only option though.  You can seek loans through other means, such as:

  • Crowdfunding - Competitive interest rates and quick approval.

  • Banks - Usually offer better interest rates than the dealerships, but might need a larger down payment.

  • Credit Unions - Might be able to offer interest rates even lower than the bank, but you usually need to be a member to apply

  • That rich uncle who offered to help - if you are this lucky, go for it!

New or Used?

Nothing beats the high of purchasing a brand new car.  You also can't beat the feeling you get as you drive off the lot and get hit with depreciation (not a good feeling).  What does this mean? When you buy a new car it immediately becomes classified as used when you drive it off the lot. This could drop the value of your car by up to 11%!  If you insist on buying new, be prepared for the depreciation.

The issue of depreciation aside, many people struggle to decide between buying new and buying used.  As with many things, your budget will play a leading role in this decision.  A few other things to consider when making your decision include:

  1. Are you able to repair or afford the repairs a used car will need sooner than if you bought used?

  2. Does the used car still have an active manufacture's warranty?  If not, is the warranty important enough to you to consider buying new?

  3. Consider the down payment.  If you have little, or no, money for a down payment then used might be a better choice.

  4. Reliability.  A used vehicle might cost less, but if it has a lot of downtime due to repairs you might find yourself in a tough spot getting to work or school.

As much as this decision will involve your financial situation, it will also involve your personal taste.  As long as you are not making a financially irresponsible decision, then you should make the purchase that appeals to you the best.

What About Leasing?

Another option when looking to get a vehicle is leasing.  Unlike purchasing, you do not ever own the vehicle you lease.  You will get to use the vehicle for a few years then return it to the dealership or leasing agency.  You can usually lease a vehicle for less than the amount it would cost to buy.  If you are cash restrained this may be a good option, but be prepared to still have to make a down payment.

A few disadvantages of leasing a vehicle include:

  1. No customization. The vehicle will be sold when your lease is over, so any customization will most likely need to be repaired with you paying the fees.

  2. Fines for excess miles.  This can be painful if you aren't careful. When you lease a vehicle you agree to a certain number of miles per year that the car will be driven.  If you go over, you are charged a fee per mile.  At $0.10-$0.15 per mile, this can add up very fast!

  3. No early termination.  Let's say you have a three year lease and decide at the end of year two you want something new.  Be ready to pay an early termination fee as well as any penalty stipulated in your lease agreement.

If you decide that leasing a vehicle is the right decision for you, then be sure to read the lease agreement very carefully.  If you have a friend or family member who has leased vehicles before, consider having them go over the agreement at the dealership with you.

As with any decision you make, be sure you know the risks and costs up front so that you can make an informed decision that won't derail your financial plans.

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