We’ve discussed Being a Smart Car Shopper and Leasing vs. Owning a vehicle and today we’ll cover a topic that every young person needs to know. Buying Your first Car is generally every young adults first major purchase. The planning and research you do can help the process be as smooth as possible and can actually help you develop healthy financial habits for all future large purchases.
Whether you are looking to buy a new or used car, here are four things you need to know when shopping for your first set of wheels:
What is your budget?
- Before you even start hitting the car lots or browsing sales websites, know what you can afford. If you look at cars first, you’ll find yourself trying to fit the car of your dreams into your budget and may end up spending more than you can really afford.
- Once you have your total available budget, be sure to consider future expected and unexpected costs like operating expenses, insurance costs, and maintenance. That means if you have a budget of $300 per month to spend on your new car, your projected monthly payments should be about two thirds of your total budget. A good way to determine your payments is to multiply your monthly budget by .66. So if you have $300 budgeted, your payments should be no more than $198. Your remaining $102 will go toward operating expenses.
Determine your down payment.
- Besides your monthly payments, you’ll need to have some upfront cash known as a down payment. Even if you decide to lease, lenders usually require a down payment. Some lenders today require very small down payments, some as low as 0%, depending on your credit score; however, this could lead to becoming “upside down” on the loan, meaning you owe more on the loan than the car is worth. Not only do cars depreciate very rapidly, but once taxes and other fees are added in, you are driving off the lot owing more than the vehicle is actually worth.
- The larger your down payment, the smaller your monthly payments will be and the less you will pay in total for the car in the long run. That doesn’t mean you should deplete your savings for a larger down payment, though. Determine what kind of down payment works realistically with your budget.
Consider the length of the loan and its interest rate.
- Often we see ads with shiny new cars and really low monthly payments. Don’t be fooled. Often these numbers appear to be so low because the length of the loan is stretched out (meaning your monthly payments last for five years instead of three years) and the interest rate is high.
- Remember, car salesmen can do a number of things to make a car payment fit within your budget. By adding another year to the loan, it’s true that your monthly payments will be lower—but that extra year can add thousands of dollars to the total cost of the vehicle.
Do your research.
- When you start your search for a new car, check what kind of loan you can get through your financial institution before you go to a dealership. This will give you a good idea of what your options are. Your financial institution may not always offer the best interest rate, but you should compare a few loans before you sign any paperwork.
Whether you are looking for a new or used car, whether you’re buying or leasing, be sure you understand all the details of your contract, loan, payments, fees, and all other factors before signing any documents. Buying your first car is an exciting event, but research and planning are necessary for a successful experience.
See you on the road!