11/06/2020
Guide for First-Time Car Buyers
What You Need to Know Before Buying Your First Car.
A big step toward feeling like an independent adult is buying your own car. However, it's important to know what you're doing — and what you're buying. There are plenty of cool-looking cars with great features, but which one is right for you? And how will you know that you're getting a good deal?
This guide is designed to help you get what you really want out of your first car purchase. From monthly payments and loan terms to used versus new, I will walk you through all the tough choices and get you ready to make the best decision.
How Much Can I Afford?
The first part of buying a car is knowing your limits. What's the most you should spend on your monthly car payment? Schools of thought differ on this question, but my view is that your car payment should be no more than 10% of your monthly take-home pay if you're buying used, or 15% if you're buying new.
You'll also need to factor in the cost of insurance and fuel. Insurance costs vary widely depending on driver age, driving record, vehicle type, insurance provider and extent of coverage, so make sure you get quotes from multiple providers based on all those specifics. Together these two costs should be no more than 7% of your monthly take-home pay.
How Do I Get a Loan?
When it comes time to apply for a loan, you have a few options: your bank or credit union, the dealership or a third-party lender. Dealerships tend to have better rates,
How Long Should My Loan Be?
More and more people are taking out long car loans to make their monthly payments more manageable, but that's not always the best idea. A longer loan will lower your monthly payment, but you will pay more in finance charges and it will take you longer to gain equity in the vehicle. These days, 72- and 84-month loans are increasingly common, but I recommend 60 months or lower — especially if you're financing a used car.
There are other reasons to keep your loan as short as possible. For example, consider how soon you might get tired of the car. If you go for a 72- or 84-month loan, by the end of it you might be ready to unload your aging ride and jump straight into a new car. But if you choose a 60-month loan, you might enjoy the car for an extra year or two with no car payments. Or go ahead and get rid of it at the five-year mark — the car is fully paid for, and you've saved the equivalent of two years' depreciation versus waiting till the end of a seven-year loan.
What About the Down Payment?
In an ideal world, you would put down 20% on a new car and about 10% on a used car, to offset the initial depreciation. But not everyone can handle that with today's car prices. If you need to make a smaller down payment, My advice is to put down as much as you can without dipping into your emergency savings. If you put down less than 20% on a new car, it may be worth looking into gap insurance. Just to be safe.
Should I Consider Leasing?
If you're into the latest tech and luxury, leasing may be a compelling option. At the end of the day, of course, you don't own the car, but you also get to skip the usual maintenance and repairs, paying only for routine procedures such as changing the oil and tires. There's no objective answer to whether buying or leasing is better, but for those who don't mind always having a car payment, it's easy to see why leasing holds appeal.
Feel free to reach out to me with any questions
