Cents and Sensibility

The Financials of Buying a Car

Ten cool points if you know which movie this is from

Around this time of year, car dealerships across the country are stocked with sleek new models ripe for the buying. Perfect timing, too, as around this time of year, consumers receive a welcome financial boost with tax refunds, raises and bonuses.

If you’re in the market for a car, you should know that it’s a big decision and has a wider-reaching impact on your finances than the sticker price will tell you. But never fear! I’ve created a game plan that will help you budget for and cost-effectively purchase your new car.

You won’t be able to create a budget until you know what it is you’re buying. So first, figure out what cars interest you. Those of you who are really into cars and know the models in and out might already know. Others might be comfortable and loyal to a particular brand, which also makes the decision easy. But if you need to start your search from scratch, keep in mind the features that are important to you, and I’m not just talking about the aesthetics or number of cup holders. You should also factor in the terrain and weather where you will be driving this car, as this can affect the tires, headlights, horsepower, fuel economy and size you might want on top of a number of other features. Don’t forget about the car’s purpose – maybe you need a van or SUV to transport furniture or a brood of fine children. Or maybe you’re a terrible driver like me and need a tiny car with which you can deftly navigate around the city streets like you’re playing MarioKart. (If this is the case, also consider the safety features and trunk space for your arsenal of banana peels.)

The Cheep Charger - agile, but impractical

And of course, there’s the cost. Once you’ve narrowed-down your options, visit Kelley Blue Book or Edmunds.com (both widely trusted sources) for the Manufacturer Suggested Retail Price (MSRP), dealer invoice price and how much people generally pay for a particular car. They also estimate the 5-year cost of a car taking into consideration maintenance and repairs, state fees, the financing on your car loan, fuel costs and even insurance, which usually increases with new cars. This will give you a better idea of how much you will actually need to budget over time.

Now that you know the true impact of your future purchase, you can figure out the financing situation. There a few ways you can do this:

  • Cash – Paying in cash is the least expensive option in the long term because with a loan, you will end up paying more money with interest over time. But unless you are a baller, shot-caller, etc. it’s not always practical option to spend that much money at one time. However, if you run in those circles and just have a ton of extra cash handy, go for it. Saving up the cash might also be a better option if your credit rating won’t allow you to have a decent interest rate on a car loan, or if you absolutely need a car, but have so much debt that another loan would damage your credit rating and you happen to have the extra cash.
  • Bank or Credit Union Loans – Even if you don’t end up taking it, it’s a good idea to shop around for a car loan at your bank or credit union before you go to the dealership. And for all you know, the rebate you’re offered might make outside financing a better option, even if it does have a higher interest rate. If anything, a pre-approved loan would give you more leverage at the dealership.
  • Dealer Financing – The upsides to dealer financing are its on-site convenience and the barrage of incentives they offer. But like I said, shop around for a car loan first, which gives you additional leverage. It’s helpful to know your credit score, as well. And be aggressive – dealer financing is always negotiable, and there may be rebates and offers provided by the manufacturer that the dealer isn’t obligated to mention unless you ask.
  • Home Equity Loan – Home equity loans are often used to pay for home remodeling, but they can also be used to buy a car. The interest rate is usually cheaper than a car loan from your bank and may even be lower than one from the dealer. Also, the interest on these loans can be tax-deductible. But these are risky. Home equity loans can stretch out for 10 years, which is much longer than a car loan. If you don’t pay off your home equity loan early, the additional interest you pay over time might erase the savings you have. Also, the interest rates can be variable, meaning they might increase. Ten years is a lot of time to hope that doesn’t happen. And if they do go up and you can’t make your payments, rather than just losing your car, you might be forced you sell your house. But if you are a risk-taker who can lock in a crazy good interest rate and has the wherewithal to pay off your loan well ahead of schedule, this can be an option for you.

Take it all in. I know this seems like a lot of information. But now that you are armed with the ability to work through the financial side car shopping (which is, let’s be real, the no-fun side of it), the experience will be easier to manage. And with the money you save, you should totally splurge on something fun. Like this:

This comes in assorted colors

Or then again, maybe not.

Images by Cinema.De, Wikia.com and Carstache

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