Jumping Into the Fast Lane: Purchasing a New Car
Purchasing a new car is a big decision and can be exciting as you upgrade your wheels. While the options for colors and upgrades are limitless, we know for most the total cost of the transaction does have a price. Deciding to purchase a new car, how much to spend and how to pay for it can challenge our mathematical thinking. Here are a few things to consider:
How much should I spend on a new car?
A new car doesn’t’ have to be new to the world with zero registered on the odometer. A pre-owed car can also be a good value and upgrade from you existing vehicle. A good rule of thumb is to have no more than 20% – 50% of your annual income spent on a car. You can use the higher end if you plan to keep the car past 200,000 until the wheels fall off it.
This is due to two things 1: anything with a motor will decrease in value and 2: you want to own the car and not have it own you. If you budget on a monthly basis and are considering either payments or a lease the payment should be no more than 10% – 15% of your monthly take home pay.
Financing a Vehicle
In short, it’s always best to save up for a car and pay cash. It gives you more negotiating power with a private seller and you save finance charges. If you decide you need to purchase a car and don’t have the money you generally have two options, payments or lease:
Making payments on a car is similar to a mortgage. You have a set term (period of time) and interest rate which is applied monthly. The monthly amount due will depend on the amount made as a down payment, period and interest rate.
Leasing a car is very similar to making payments, but you are only paying for the amount of the car you use. For example, if you like to have a new car every three years and drive 15,000 each year then creating a lease for a three year period with a maximum of 45,000 might make sense for you. The cost is more expensive due to the finance charges and you do need to have a plan for the end of the period when moving into you next car.
The best way to purchase a car is making an informed, throughout decision that works for your family. There are so many resources and searches you can do prior to even going to a dealership and you might even purchase a car on-line sight unseen.
Continue the conversation with us at our podcast where we talk to John Schmoll. John writes a blog www.frugalrules.com where he recently debunked the need to have a car payment for the rest of your life.