Buying a car is a big decision, and the wrong choice could leave you in financial ruin. While cars are typically necessary to commute to work, errands, and entertainment, you shouldn't purchase a vehicle you can't afford.
Before buying a car, it's essential to create a budget considering all the costs of owning a vehicle, including gas, insurance, tolls, maintenance, and repairs.
The car's purchase price is only the beginning, and if you finance or lease the vehicle, you'll have ongoing monthly car costs plus the cost of owning a car.
Determine if you Should Buy or Lease a Car
If you don’t have the cash to pay for a car’s full purchase price, you may have the option to finance or lease a car.
Both require monthly payments, but when you finance a car, you own it with a lien.
Once you fully pay the car loan, you regain possession of the title and can do what you want with the car.
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A car payment includes principal and interest or the charges for borrowing the money.
Car loans have fixed rates and terms; you can pay them off early if desired.
If you lease a car, you rent it from the leasing company.
Unlike financing a car, you don't own a leased car and must follow their rules which may include restrictions on mileage or how you can use the car.
You're still responsible for regular car maintenance, but your car lease contract will determine if you're responsible for other mechanical repairs.
All damage, such as those from an accident, is your responsibility.
Leased cars may also incur extra expenses, including:
- Security deposit
- Excessive wear and tear
- Excessive mileage
- Early termination fees
Choose the Right Type of Car
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In deciding to buy or lease a car, consider your requirements for a car. Don't buy more than you need, making your payments excessive, but be sure the car meets your requirements.
5 Answers for Your Basic Requirements
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How much room do you need?
Consider the passenger space you require. For example, do you need a third row, or is a standard five-passenger car suitable?
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How much cargo space do you need?
Consider how often you haul large items. For example, do you go camping often or use your car for other large hauls? If so, cargo space is essential.
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How will you use the car?
Is the car meant for commuting, transporting your family, or for long road trips? How you’ll use the car will determine how much focus you should put on fuel economy.
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How comfortable are you in the car?
Consider how comfortable you feel in the seat and driving the car. Also, consider what it feels like to be a passenger, especially if it's for use on long drives. -
Do you need an all-wheel drive car?
If you live in an area with bad weather conditions, you may consider an all-wheel drive car. If not, getting a standard front-wheel drive vehicle could save a little money on the car's cost.
Total Cost
After considering all your requirements, compare cars that meet them to what you can currently afford.
If most cars fall outside your price range, consider saving longer for a larger down payment to keep the cost within your budget.
Your monthly payments should never exceed what you can afford and should include the regular cost of the following:
- Fuel costs
- Parking
- Tolls
- Insurance
- Car maintenance and repairs
New or Used Car
After considering what you can afford, determine if your price range falls within the used or new car ranges for the type of car you need.
If considering a used car, look at options, such as certified pre-owned vehicles, so you have the reassurance the car was thoroughly inspected by a professional and may also have the remaining term of the original warranty.
If you purchase a new car, keep in mind that after five years, the car will likely lose 40% of its value to depreciation.
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Factor that into the cost of owning the vehicle to help determine if a new car makes sense.
Get Pre-Approved for Financing
If you decide to finance a vehicle, consider getting pre-approved before looking at cars. Even if you purchase the car from a dealer, you don't have to get financing from them.
In fact, it’s best to look for financing on your own to compare your options.
When you apply for financing at the dealership, they will only show you the options that pay them the most on the back end, which may not include the most attractive financing terms for you.
Consider getting pre-approved with three or more lenders to determine which offers the best rates and terms.
Explore your Financing Options
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As you consider your financing options, look at many scenarios, including:
- Different terms to see which payment you can afford while keeping your interest costs down
- Play with the down payment amounts to see how they affect your payment
- Consider how much money you’ll have left for unexpected expenses, especially car maintenance or the deductible on your car insurance
- Consider the interest rates charged by each lender and try to keep your rate as low as possible
Final Thoughts
Before buying a car, do your research. Consider what you can afford, the type of car you need, and whether you're willing to gamble on a used car or eat the depreciation cost of a new car.
Purchasing a car is a big decision that will affect your finances for several years or longer, depending on how long you keep cars.
Finding a car that's affordable, dependable, and doesn't have a lot of mechanical problems is the key.
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A new car will have a warranty, but they don't last forever. Consider the average cost to repair similar cars when deciding which car is right for you.
