Buying a car can be fun, but make sure you catch all the hidden costs before making a purchase.
I have spent a lot of time recently talking about budgeting for kids, a wedding, and a first house. All items are extremely important, but also items that might not happen the first year or two that you are in a new job making “real money.” Also worth noting — kids, weddings, and houses are far more expensive than a brand new ride, although some of the shortages from the supply chain issues following COVID-19 have certainly driven the cost through the roof.
Even with that being said, I remember being 22 and getting my first real check, and deciding that it was time to upgrade from the car I had driven since I was 16. Truthfully, it’s not the smartest financial decision to invest in a car, but who am I to tell a young kid that? I was that age once and did the exact same thing.
Even if you aren’t a young kid looking to buy your first new ride, budgeting to buy a car at any age or point in life is extremely expensive. I went through the phase about 10 years ago buying my first new car, and now recently went through the process of getting my wife a vehicle that can easily transport kids to all the activities that they are involved in. My parents are the next step further; they both retired and are now looking for a vehicle that will get them around town and has enough room for them to travel to Florida for 3-month periods of time in the winter.
You’ve heard me preach time and time again that the key to buying anything is budgeting for it properly. It will come as no surprise that when buying a car, there is no more important piece to the puzzle than a budget. Understanding exactly how much that car will cost you each month will help you understand exactly how much you can spend.
A car is one area where the “added expenses” can certainly pile up quickly. Think about how a house has add-ons with it as well. You must pay for electricity, water, and gas, and the bigger the house is, the more expensive those costs are. So, when budgeting to buy a car, don’t forget these items or you could find yourself upside down quickly.
When budgeting to buy a car, one thing you must do is think long-term. Is this a car you are going to have for a long time, or is this something you are going to want to sell in two years? I have changed as I have gotten older, but I’m one that loved to trade in cars every couple of years and get something new.
Why does that matter? If you want to trade in cars constantly, never buy anything new. As soon as you drive a new car off the lot it decreases in value by 15 to 20 percent, so you’ll never drive it long enough to make it worth the additional costs of buying new.
What are the biggest perks of a new car? Lower interest rates, and typically a nice warranty to protect yourself if something goes wrong. While those are great features if you are planning to drive the car for seven to even ten years, it’s really not anything that important if you want to drive it for only a couple of years.
A car is something you typically will make money on, but if you plan on only driving it for a short time, you’ll lose far less money by buying used. I’m not saying buy a car that is ten years old with 100,000 miles, but a two-year-old car with 15,000 to 20,000 miles is sometimes the best way to go.
You may not get as good of an interest rate, but you aren’t taking on the quick depreciation of the car, and if you needed to trade it in quickly, you hypothetically shouldn’t lose that much money. Don’t get me wrong, cars typically have some markup, especially at a dealership, but you aren’t losing that 20 percent the moment you drive it off the lot.
Although some would argue that trading in cars constantly is a bad move, I had some success at it. I would never make the argument that I made money, but I also don’t think I did that bad and constantly had a new car. My point is, it doesn’t matter what your style is when budgeting for a car, but just know the type of person you are before deciding.
If you want to upgrade quickly, buy used. If you are in it for the long run, it may make sense to look at new cars.
Don’t Forget About Maintenance and Care:
Even if you decide to buy a new car that has a warranty for anything that could go wrong, you must factor in some preventative maintenance when budgeting to buy a car. The best car in the world is still going to require three or four oil changes in a year, and tires and breaks are still only going to last so long. I have a very basic full-size car and the last time I needed tires and rotors, the bill was almost $1,200 for all four tires.
In this world of inflation that we are living in, mechanics certainly haven’t gotten any cheaper. My wife bought an SUV that had 15,000 miles on it about a year ago and two weeks into driving it, the check engine light came on. I took it into the shop and basically, a computer chip that cost $800 had gone bad. Two weeks into the car and I was already $800 deep in maintenance.
I don’t wish ill on anyone when it comes to bad car luck, but my point here is to be realistic about the maintenance for your new car. Please don’t assume one oil change a year and nothing else so you get a car payment that you can’t afford the first time you have to take it into the shop and have it looked at for a mechanical issue.
Another item you can’t forget about when budgeting for a car is the care for it. It sounds silly to say, but I have roughly $40 to $50 a month in the care of my vehicle. I pay $29 per month for unlimited washes, and then anywhere from $10 to $20 a month for products to take care of the interior.
I remember when I first started driving, $1.50 in quarters was all you needed to keep it clean. Maybe you aren’t a person that takes really good care of your car, but something that expensive is something you want to last and does require some tending to. It may seem crazy, but if you’re already on a tight budget, an extra $50 a month you didn’t plan for to make sure you can keep your car clean can put a damper on your month.
Loan Term and Interest Rates:
So not only do you have to think about how long you’ll own the car, the maintenance of the car, and the care for the car, but you also need to think about a loan term and interest rate (which I briefly mentioned earlier) when you begin budgeting to buy a car.
One of the biggest no no’s that you’ll see people do is borrow a car with an extremely long loan. Personally, I think it is a bad idea to take an auto loan out for longer than 60 months. Most people in America don’t drive a car for more than five years, so taking a loan out any longer is typically not a great idea.
A few things can happen if you take out a loan term that is too long. Number one, it’s easy to get upside down on your car. Because you are paying so much on interest and not enough in principle, you can get into a situation where you owe more than the car is worth. That is never a good thing especially if you ever get into a tough financial situation.
The second thing that can happen on a longer loan term is really two parts. Part one, the longer the term, the higher the interest rate you will be charged because the higher risk the loan becomes. Obviously, the higher the interest rate, the more the payment for the car will be.
Part two of this scenario is the longer-term payments can get costly. Even though you are dividing the payments out over a longer period, you will be wasting money on additional interest. Even if the interest rate were the same for a 60-month and 72-month loan, you have 12 extra months of paying the interest. But to make things worse, you’re also paying a higher interest rate for all 72 of those payments.
Trust me, I understand the temptation to take the longer-term loan just to save a few bucks so you can afford something nicer, but in the long run, it is costing you way more money and could put you in a bad situation if you ever had to move on from that vehicle.
Insurance Costs and Deductibles:
Even if you don’t want to admit it because you want to buy a more expensive car with a limited budget, you’ve likely at least thought about all the items I’ve mentioned above. It’s super easy to just lowball the cost to justify to yourself why you can spend more, but it’s at least crossed your mind.
The last item I want to touch on today is something that definitely crosses your mind, but you may not truly understand the extra costs that can be associated with auto insurance and your deductible. Obviously, insurance is one of those things you pay for that you hope you never have to use, but acting like the cost doesn’t exist is silly.
First and foremost, the type of vehicle that you buy can drastically affect the price of your insurance. A four-door car with a good safety rating may cost you $700 per year depending on where you live, and a two-door sports car with a big V8 engine could be double that price. Not only is the safety rating much lower, but you’re at much higher risk of also getting a ticket just from a statistical point of view.
Insurance costs can vary tremendously from state to state, so please don’t use my actual number as a true reference, but the variance in pricing based on the type of vehicle that you have is a very real thing. Also keep in mind the more expensive the vehicle you drive, the more expensive the insurance policy will be as well. It makes sense when you think about the additional risk for the insurance company if they would be forced to replace the vehicle.
One last small item to consider when budgeting to buy a car is the type of deductible you want to have. The higher deductible you have, the less your policy will cost. Some people just get an auto policy that is as cheap as possible, which is fine, but you really should talk to an agent and make sure you are covered properly. Again, it’s easy to go cheap on insurance so you can spend more on the car, but if you are in an accident or if your car happens to be stolen, you want to make sure you have yourself completely covered.
Please don’t take this as me trying to rain on your parade or be a Debbie downer if you’re thinking about buying a new car and this has changed your mind. These are all recommendations based on my experience, and sometimes it takes going through an experience to truly learn your lesson.
Buying a car can be an extremely exciting time depending on the circumstances, so I understand it’s easy to overcommit. You don’t have to get a stripped-down model with crank windows to prove that you are budget conscious, you just need to make sure you think about all the little things before pulling the trigger.