Buying a car can be a huge strain on your finances, especially when you’re in your 20s. At this age, you’re just starting a brand new chapter in your life, complete with beginning a new career, living on your own and dealing with the added stress of paying back student loans. Bridget Casey, a finance expert, blogger and owner of Money After Graduation, sat down with us to share some tips on how you can find a car that will not drain your finances.
Buying New Vs. Used Cars
One of the first things you should think about is whether you should purchase a new car or a used one.
Some of the advantages of buying a used car include a lower cost and declining deprecation. “I would definitely choose used over new because they are cheaper,” shares Bridget. “A new car starts depreciating as soon as you drive it off the lot, which means that you immediately lose money on your new purchase.”
While what Bridget shares about the benefits of a used car can be true in some cases, purchasing a new car has ultimately more advantages in the long run than a used one. By purchasing a new car you get special advantages such as lower loan interest rates (in most cases), longer warranty, the latest features and gadgets and owning a car in top condition. Used cars on the other hand often come with limited or no warranty, fewer feature choices and higher maintenance and repair costs.
Account for Car Ownership Costs
Start by creating an overall car budget, which should include information such as what your monthly income is and how much you are spending each month before your car purchase. Next, try to calculate how much your car-related costs would be, keeping in mind things like car maintenance, insurance, car repairs and tire changes, to name a few.
One of the most difficult car-related costs to budget for is fuel. “You don’t have any control over gas prices,” shares Bridget Casey. “Instead of trying to predict them, build some buffer room in your budget to account for possible changes. $100 per month is a reasonable amount in some cases, but it would ultimately depend on your car and driving habits.”
Negotiate Your Purchase Price
Bridget Casey says that the worst mistake you can make when purchasing a car is to not negotiate on the price. “[People] grab the first deal they get because they are afraid that if they ask for a better one, it will disappear altogether,” states Bridget. If the car dealership is unable to budge on the price, try to negotiate instead for other perks such as free satellite radio, car and trunk mats, or specific in-car features.
To help you out in the negotiation process, Bridget also recommends doing your research beforehand on your vehicle. This way you know already going into the dealership what the average price of the car is and what a fair negotiation price would be. “If you know that you can get a better deal because you’ve done your research, then you should always negotiate,” shares Bridget.
Explore Your Payment Options
The most common payment options include paying upfront with cash or taking on a long-term loan payment (such as financing or leasing). Which option is better for you? Well, it all depends on you and your car budget.
Bridget Casey ultimately recommends paying upfront with cash being the better option in the long run as it is cheaper to save up for a car instead of dealing with interest rates during the loan period. “I would always defer to paying in cash instead of financing or leasing,” shares Bridget. “That way you know exactly what you can afford.” To understand what you can afford, Bridget additionally recommends keeping the total cost under 10 per cent of your overall income. “So, if you can only afford a $10,000 car, then you are better off purchasing that instead of making monthly payments,” states Bridget.
If you do decide to take on a long-term loan payment, Bridget recommends making a down payment as big as you possibly can to help pay off your loan quickly. “Your loan should last no longer than five years because, if it’s any longer, you can end up owing more for your car than it is worth.”