Purchasing a new car can be a harrowing experience. So much has changed over the years. Remember when the average term for a car loan was three years? Rising prices have pushed lenders to draw auto loans out to 7 and even 8 years. Is this a good thing or a bad thing?
Think back to your beginning finance classes where you learned the difference between appreciating assets and depreciating assets. With a few exceptions, cars fall squarely into the depreciating asset side of the ledger. If a loan is stretched out over a longer period and the car is dropping in value, it is not hard to end up on the wrong side of this equation – owing more than the car is worth.
Sometimes the purchase of a vehicle is driven – pun intended – by wanting something rather than by applying logic to a need. You can avoid a costly situation by doing some homework before you make a purchase. Here are some things to consider before your next purchase.
(1) How much can you afford monthly?
This should be a starting point. Take this payment and find out how much you can afford to spend with a 4-year or 5-year loan. If you can afford a $325 payment, you should look for a car around $17,500. This is based on a 5-year loan at 3.99% APR. Most banks and credit unions offer online calculators to help estimate monthly payments. Don’t forget about the extra costs: sales tax, licensing, and insurance.
(2) Should you buy new or used?
It doesn’t take long for the excitement and new car smell to wear off. Buying used is often a better value and prevents you from owing more than the car is worth.
Most new cars have a high level of depreciation in the first 12 to 24 months after purchase, some see a drop of 30 percent or more. Others will lose that amount over three years. Even if you plan to hold onto your car for a decade, you will come out ahead with a little research. And keep in mind, a vehicle that depreciates quickly in the first couple years may be a poor choice for a new car, but worth considering if you are looking to buy a used car.
(3) How is the car rated?
Consumer Reports offers a wealth of research-based information on new and used vehicles. The focus is on safety, reliability, and resale value. You can sign up online to use the service and it’s well worth the price, or find similar information for free on the website of another trusted source.
Treat yourself well financially. Before hitting the car lot, know what you are looking for and how much you can afford. Make your car-buying experience less stressful and sidestep remorse when the deal is done.