I recently had a client reach out and say that their car of 12 years is totaled, and they don鈥檛 know how to approach getting another car. If your work or lifestyle relies on access to a car, acquiring your next car can be stressful given today鈥檚 interest rate landscape and recent inflation. Here are some financial considerations and strategies for getting your next car.
Budget
As with all major financial decisions, getting your next car will either affect your financial picture, either by depleting cash on hand or by increasing your monthly spend. Before you do research on cars you may want, you need to determine your budget and hold firm on that maximum number.
If you鈥檝e got cash on hand but spending more than $20,000 would deplete your emergency reserves, that鈥檚 your maximum number. If you need a loan and after reviewing your budget, you know you can only spend $600/month maximum for car expenses, that鈥檚 your maximum.
Decide On Non-Negotiables
For the client I spoke with, his auto needs were limited. He doesn鈥檛 have small children to cart around, he doesn鈥檛 drive through wilderness or snow, and just needed a car with good gas mileage for his 30-minute morning commute. He wanted a reliable, budget-friendly sedan.
If your lifestyle needs something a little heavier duty, be sure to factor that in before starting your research. Here are some potential non-negotiables to consider:
- Design
- Space
- Safety
- Gas mileage
- Range (if electric)
- Four-wheel drive capability
- Company reputation
Research And Hold Firm
Today, it鈥檚 easier than ever to receive accurate quotes for car trade-in values and prices for both new and used cars, often with insurance and maintenance costs factored in. You can generate a full picture of what you expect in minutes.
Unfortunately, most dealerships are incentivized to drive prices up and steer you toward their financing team. They often use high-pressure sales tactics to cause you to make an emotional decision on the spot, instead of a logically driven financial decision. In my opinion, this is the worst part of the process.
You鈥檝e got your research; you know what the car you鈥檙e looking for is worth. Do not let them talk you into a higher price, the wrong color, or extras you don鈥檛 need just because you鈥檙e getting worn down by the process. It could be worth walking away or going to a different dealership if you鈥檙e not getting your way.
Buying A New Car
Frankly, unless you are dealing in collectibles or limited-edition cars, it鈥檚 almost never a sound financial decision to purchase a new car. It鈥檚 an emotional decision. According to Edmunds, a new car will lose 9% of its value the second you drive it off the lot. It can also lose up to 45% of its total value in the first year of ownership because depreciation happens the fastest early in a car鈥檚 lifespan.
If you鈥檙e set on a new car, plan to drive a lot, want to keep the same car for a long time and have the money on hand, it will be a better decision to purchase the car outright than to finance it.
Buying A Used Car
Those who opt to buy used cars will generally get the best value for their money, as long as they get that car鈥檚 full history and there are no accidents or other red flags. Even used cars are depreciating assets where you鈥檙e unlikely to profit off a future sale unless you got a below-market rate to start. Like the new car scenario, if it鈥檚 in budget, you plan to have the car for a long time and drive a lot, I recommend purchasing outright in today鈥檚 rate environment.
Financing
If it does not fall within your budget to purchase a new or used car, you may want to consider financing that purchase or leasing a vehicle. If you know you plan to finance, you should research rates and terms in advance. It may be the case that a third party can offer you a better deal than the dealership鈥檚 finance team. Be sure to read reviews and familiarize yourself with the lender鈥檚 reputation instead of jumping at the lowest rate. Securing financing in advance can help smooth out the process at the dealership and save you money.
Leasing
Leasing is a great option for people who don鈥檛 drive very often and would like to always have a new car. There is a relatively low upfront cost and you will have a contract to have the car for a specified number of years, typically between two and five years. The thing that usually holds people back is the fact that many of these leases come with strict mileage requirements and heavy penalties for going over mileage or returning the car in an imperfect condition. Leasing also typically requires more expensive car insurance, which should be factored into the budgeting equation. Let鈥檚 just say if you love road trips, this probably isn鈥檛 the option for you.
Conclusion
When it comes to getting your next car, there are several financial considerations and strategies to keep in mind. Ultimately, the right approach will depend on your individual circumstances, preferences, and financial situation. By sticking to a budget, understanding your non-negotiables, and doing your research, you can navigate the process with greater confidence.