How Much Should You Spend On A Car?

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4 months ago

How Much Should You Spend On A Car?

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4 months ago
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If you want to go anywhere in today’s society without relying on public transportation or spending way too much on gig economy applications, you need to purchase your own transportation. However, in today’s world where money may not be as easy to come by, figuring out exactly how much you should be spending to get a quality car without breaking the bank can seem like a futile task. If you’re looking to buy a new car but don’t know where to begin or how much you should be spending, dive into the guide below for comprehensive information that will help you in the car-buying process.

The State of Car Buying

If you’re someone who’s shopping for a new or used car, the bad news is that the market is not operating in favor of buyers right now. While used cars were more affordable for most shoppers in the past, the pandemic has forced prices to rise significantly, with used car prices rising almost 30 percent between May of 2020 and May of 2021. That means that securing a quality used car at used car prices can be extremely difficult in today’s market, making it even harder to be frugal.

Then I’ll buy a new car, you may think to yourself. This won’t necessarily bring down the cost of a new car either. Because of chip shortages that were experienced during the pandemic, new car prices are also relatively high due to the shortage of vehicles being produced. Overall, the market isn’t the most friendly for those looking to buy a car now. However, this should change over time, and if you’re really diligent about finding a car, you should be able to secure a great deal with the right hustle.

Before You Buy: The Hidden Costs That Come With Buying Your Own Car

A car is a major investment, and like buying a home, there are often many hidden expenses that can take buyers by surprise, taking more of their money than they initially anticipated. In order to truly afford a new or used car, you have to plan ahead for all the expenses associated with buying a car. Some of the hidden expenses you should keep in mind include:

  • Financing Charges (and Subsequent Leasing Payments): Few people have the cash to buy a car outright or may simply not want to. If you intend on taking out a loan and making regular car payments, you have to think about the initial financing charges that you will have to pay once you actually secure the loan. Then, you will want to budget in the subsequent lease payments to make sure that you have plenty of room in your budget to avoid defaulting immediately after you’ve purchased your car.
  • Your Down Payment: Much like a house, you’re going to want to put some money down in order to reduce the total amount you owe and decrease your monthly payments. Sure, it’s going to cost you more money upfront, but there’s a big difference between paying $500 a month and paying $200 a month. If you really want to keep your payments low so you can avoid breaking the bank, save up for your down payment long before you begin car shopping.
  • Sales Tax: Yes, there is going to be sales tax on your car. Because it’s such a large purchase, you can expect to pay a significant tax, with many sales tax charges ranging anywhere from 2 percent to 8 percent of your purchase. Do you live in an area where sales tax doesn’t exist? Don’t think you’ve gotten lucky just yet. Some areas may still charge a special tax. Always consult your local dealerships to learn what they charge so you can budget accordingly.
  • Dealership Fees: More fees?! Yes! Dealerships may actually charge a host of fees just to sell you your car. This can include fees like processing fees or documentation fees to get all of the paperwork filled out and prepared, preparation fees to make sure that your car is ready to drive off of the lot, and even advertising fees for selling your car to you! As with the sales tax, speak with local dealerships ahead of time and see if you can either plan ahead for these costs or even negotiate them.
  • Title and Registration Fees: We’re finally reaching the end of the fees that you have to pay to acquire your new vehicle. To actually drive a vehicle legally, you’re going to need the title and registration to prove that it’s yours. These fees, and other related fees that the DMV may make you pay, may cost a couple of hundred dollars to take care of. Speak with the DMV beforehand to budget these costs into your car budget.
  • Insurance: Now we’re getting to some of the costs you will have to consider beyond just your monthly car payments. Car insurance is relatively cheap, but you have to be sure that your car insurance covers any type of accidents that you may get into and will actually cover your damage so that you don’t end up having to pay for damages out of pocket. Make sure that you do your research thoroughly to find the best possible car insurance for your needs.
  • Gas: Ah, gas. If you want to go anywhere, you need to have gas in your tank. Gas is by no means cheap, so it’s best to come up with a plan of action to find extra ways to earn free gas or find extra money to pay for gas if you’re going to need to travel far or frequently.
  • Maintenance Fees: Cars are not built to last forever, and you’re likely to run into issues somewhere down the road. Much like if you have an emergency fund for day-to-day expenses, you should put aside some money for potential maintenance on your car in the future. The more you have saved, the better prepared you will be for an emergency when it arises.
  • Parking: Most places have free parking, but some larger cities make you pay to park everywhere, which can get quite expensive over time. Whether it’s parking or toll roads, calculate these types of expenses into car ownership as well.

As you can see from the above, there are far more expenses to buying a car than just purchasing the car itself. Before you start looking for cars near you, calculate all of these expenses into your budget so that you’re financially prepared for owning your own vehicle.

Okay, I’ve Budgeted All of the Above… Now How Much Should I Be Spending?

If you are confident that you have the funds to purchase a car and cover all of the hidden expenses you will have to deal with later, we can figure out exactly how much you should be spending in order to get a car that you can rely on. Some of the figures that people provide may not be realistic, so it’s best to do what makes the most sense to your situation. With that in mind, here is the general guidance.

  • If you’re looking to spend a good amount on a car, aim to spend around 35 percent of your total annual income on a new or used car. Even if you don’t make the most money per year, you can still afford a good used option without going way over your budget. If you make more money, you have even more options at your disposal.
  • If you’re looking to be frugal, you may want to only spend 10 percent of your annual income on a used or new car. Now, this guidance may not work for those who have a lower annual income as 10 percent may not even be able to afford you a good used car. Instead, use your discretion and plan ahead by saving more money. This way, you can afford a car that won’t break down or cost you more in repairs than it’s worth.
  • If you’re looking to spend an average amount on a car, you should aim to spend about 20 percent of your annual income on a new or used car. This is a fair amount that falls in between the two suggestions above that should provide those with high-income and low-income an affordable new or used option.

It’s important to remember that it all depends on how much you’re willing to spend and what you’re going to get in return for your money. If you can only invest a little and it won’t provide you with the quality that you need, it’s best to wait until you have more money to invest so that you can get something that won’t break down in a matter of months.

How to Make Sure You’re Getting a Good Deal on Your New or Used Car

If you plan on purchasing a new car, the process is relatively simple. All you have to do is to do your research so you know what you plan on purchasing and how much it will cost, look around for great deals on that model and different financing options that you can afford, and have great negotiating skills that you can put to use once you’re on the dealership lot.

If you plan on purchasing a used car, the process is going to be a bit more involved as the potential for scams abound when purchasing a used car. Let’s dive into a few tips that can make sure you’re putting your money to good use when you’re going used car shopping.

Inspect the Car Before Purchasing It (and Get As Much Information As You Can on Its History)

It’s never a good idea to buy a car without fully inspecting it yourself and having it professionally inspected. However, if this is your first used car purchase, knowing exactly what to look for isn’t always obvious. Some of the key areas that you should be focusing on when you’re examining a used vehicle include:

  • The exterior of the vehicle: You should look at the quality of the body, the tires, the shock absorbers, and the lights. If any of these things seem to be in poor condition or not functioning at all, see if you can get these fixed beforehand or go to another car listing.
  • The interior of the vehicle: Likewise, you should inspect the interior of the car to examine the upholstery (seating, roof, trunk), making sure all of the internal components are in place and functional, and checking under the hood to look for any damage. As with the above, see if the car can be repaired or find another dealership/private seller.
  • Leaks, water damage, etc.: If your car has any leaks, signs of fluids that do not indicate a healthy system, or even water damage on the inside of the car, these can be causes for concern as well.
  • Vehicle Identification Number (VIN): Looking up the VIN can tell you more about the history of a vehicle and let you know whether it matches up with existing records. However, some cars may not have a history if they’re older, which is something to keep in mind.
  • Vehicle history: You can learn more about a vehicle’s past by using the VIN or the license plate, which will provide you with more in-depth information that will allow you to make more confident buying choices.
  • The window sticker: Window stickers on used cars in car lots will often include important information and details about your purchase. Make sure that you read these special terms and conditions so you can avoid purchasing a car with limited protection.

As long as you follow this advice, you should be able to purchase a used car without spending money on a lemon!

Focus on Low Mileage and Great Quality

Most car buyers know to look for used cars with lower mileage if they want their investment to last for a while. However, low mileage doesn’t necessarily mean a great deal. Cars with low mileage that haven’t been driven for years may have parts that are now non-functional or in very poor condition. Whenever you find a car with low mileage, make sure to inspect it so that you know it won’t require repairs as soon as you start driving it.

Try Looking for a Certified Pre-Owned Vehicle

Purchasing a certified pre-owned vehicle will help you avoid purchasing a car that is not as advertised as dealers that offer CPO vehicles have their stamp of approval on it. This means that the quality is guaranteed and that it comes with a set mileage and age so you can guarantee it meets your needs. Just double-check with the dealer you’re buying from so you know what their guidelines are for a CPO and whether or not it comes with a warranty and other safeguards.

Always Ask for a Test Drive

Test-driving your cars tells you more about how the car handles, whether or not there’s any cause for concern regarding some of the dash lights, and just how healthy the car actually is. If someone refuses to allow you to test drive the car, this may be a red flag that should tell you to shop for a used car elsewhere.

Don’t Rush Yourself or Jump Into a “Deal”

Most importantly, take your time! You should never rush into a deal simply because it feels like a steal. Do your research, see what types of options appeal most to you, and only buy when you feel confident that you’re making a good investment and you’re happy with the vehicle. Otherwise, you can end up with a used car that you can’t get off of your hands.

Car Shopping Can Be Complicated If You Don’t Know What to Look for…

However, once you have a better idea of what you should be spending, which expenses may show up to surprise you later, and how you can find the best car for your needs, the process becomes easy. If you’re ready to purchase a new or used car and need some additional guidance, use the guide above to get all the practical financial advice you need to buy confidently.

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