New cars are fun. Figuring out how to pay for them and what you can afford can be less so. While less complicated than buying a house, getting yourself a new car is still a major purchase that has lots of layers to it. Let’s unpack.
To lease or not to lease
Much like our article on financing your home, you have to decide if it makes sense for you to lease a car or buy one outright. Generally, it’s considered a better investment to buy your own car since its value will count towards your net worth.
Buying a car gives you complete control over it. You can drive, customize, sell, and essentially do whatever you want to it because it’s yours. Leased cars come with fees for excessive mileage, wear and tear, returning them early, and limits on how long you can own them.
People who lease cars mainly do so because the monthly payments are cheaper than buying a car and they don’t have to worry about expenses from long term wear and tear on the car.
Also you’ll have to consider whether you want to drive a new or used car. Leasing will automatically get you a new car, while someone buying a car will have to decide whether they want to spend extra for a new model.
Whichever you choose, don’t change your mind. Cars depreciate in value the second you drive off the lot with them.
If after 2-3 years of car payments you’re ok with returning your car and starting the process over again, then check out leasing. Otherwise buying may be the way to go for you.
Negotiating the Price
There are several tools at your disposal you can use to get the best price possible on your car. The first is to use apps like TrueCar, which allows you to compare prices of different dealers, see what others in your area paid for their car, and even provides a TrueCar Estimate of what your car should cost.
Also the time of year you buy your car can save you some money. Car dealerships survive on bonuses for reaching sales quotas. These quotas are tracked monthly, quarterly, or annually (and sometimes all three). That means there will most likely be more sales, and sales people willing to negotiate, the closer it is to the end of the quota period.
Speaking of negotiating, the best way to not get suckered into overpaying for a car is to have done your homework. As long as you know what car you want, what it should cost, and what others are selling it for, you have the power in the negotiation.
Unless you’re buying an exceptionally cheap car or have a strong financial standing, you’ll probably have to take out a car loan. You can do this through a financial institution (such as a bank or credit union) or directly through the dealership from which you buy your car.
The biggest difference between the two is your dealership will be more convenient and offer more options. This is because they may have incentives in place to encourage you to take out loans with them, as well as relationships with multiple banks to provide you with a bevy of different loan packages.
Part of what determines the quality of the loan you receive and the amount you pay monthly will be APR, or annual percentage rate. The lower the APR the less you’ll owe in the long run, but you’ll have to weigh that against the length and size of the down payment.
The best way to decide what type of loan to get is to shop around. If you do end up going with a dealership loan, that’s something to consider when choosing your car.
Understanding auto insurance
The car itself isn’t the only purchase you’ll make. You’re almost guaranteed to be required to buy some type of insurance with it since most states require it.
With auto insurance you’re getting protection for yourself, your car, and other people and their cars–to some extent– in the case you’re involved in an accident.
The amount of protection you get will vary by state, since each one has different standards for minimum coverage. Auto insurance policies are way more expensive for newer drivers, and costs will usually go up for every car-related accident or violation you’re involved in.
There are many different auto insurers out there. Compare quotes from all of them at the DMV website.