Auto Loans 101
Step 1, Part 1: What Can I Afford?
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Brake for Budgets
Slam on your brakes if you’re buying a car without a budget! According to Bankrate.com, most people have only a vague idea of what they can afford when shopping for a new car.
Before you find yourself unable to make payments, gas up or afford maintenance, examine your bank account and your budget. Be sure to think beyond the monthly payment and leave room in your budget for other costs related to auto ownership.
For example, here are a few ways buying a car will impact your budget:
Monthly Payment
If you currently have a car payment, consider the cost of the vehicle you want to buy. Will it increase or decrease your monthly payment? If your payment goes up, can you afford it? Where in your budget will that extra money come from? If your payment goes down, consider putting the difference into a savings account or shifting it to other financial priorities.
If you don’t currently have a car payment, then you’ll have to figure out how to budget for an entirely new expense.
Insurance
Which car costs more to insure: a luxury car with all the available safety features or a standard model economy car? According to Edmunds.com, the economy car might be cheaper to insure, but it depends on how much the luxury car costs to repair or how likely it is to be stolen.
When looking for a car, research how different types of vehicles will affect your insurance rates. Call your insurance agent to request quotes based on a few models you’re interested in. This may make the difference between a turbo-charged engine and a minivan.
Fuel & Maintenance
Just because you can afford the loan payments on a restored classic or impressive monster truck doesn’t mean that you can afford to keep it running. With gas prices fluctuating constantly, it’s essential to think of your monthly fuel costs as a part of the total cost of buying a vehicle. Check out this gas mileage impact calculator to help you compare the gas mileage of a wide range of vehicles.
When considering fuel costs, perhaps the economy car looks a little better than that monster truck. Well, what about that mint-condition classic car whose previous owner only drove it on Sundays?
This is where maintenance costs come in. Here are a few things to think about regarding vehicle maintenance:
- Where was the car made?
- How do you order the parts?
- What types of mechanics are trained to work on the car?
- How long does it take to order parts?
- What will you do without a car while it is being repaired?
The classic car might sound like a great deal but if you have to wait three weeks to order parts from Australia and rent another car to get to and from work, maybe this isn’t the car for you either.
Of course, if your budget is on track, you save regularly and make enough to easily cover the costs without sacrificing your financial goals or security, then the sky is the limit for you. Just remember, a car can’t help you build wealth since you likely won’t get back what you put into it.
If you need help creating a budget, check out our budgeting information for help.
