Do you need a car?
Cars are rarely a good investment. By that, I mean cars lose money. Some collector cars or other rare cars can become more valuable, of course, but most of the time cars lose money. You have to pay for the actual car. You have to maintain it and fix it. Taxes and other fees are due every year. You also have to buy gasoline to even use the thing. Overall, every day you have a car it becomes worth less money and forces you to spend your money on it.
If you don’t need a car, and can use public transportation, then you can potentially save quite a bit of money. For most of us in the US, public transportation won’t work. Since public transportation won’t work, it comes down to figuring out a reasonable cost for a car.
Used vs New
Most of us know that a used car is generally a better idea than a new car. There are several reasons for this.
- New cars depreciate rapidly. A new car can lose 20% of its value in the first year of ownership, and another 10% for each of the next four years. By letting someone else buy that new car, you let them pay for the privilege of a brand new car. Then you buy the still good car for much cheaper.
- New cars are worth more for a few years, and demand more taxes. In most places, property tax rates are based on the value of the property. A car with a higher price tag leads to higher taxes.
- New cars can cost more to insure. Again, that high initial cost means you have to be insured for more.
However, there are some exceptions.
- New cars can have better financing terms, with some dealers offering 0% financing on occasion.
- They also can include the first year or two of maintenance at no extra cost.
- Finally, there are certain models of vehicles that actually don’t depreciate rapidly enough for a used model to be much cheaper than new. In these situations, a 2 year old vehicle can cost the same as a brand new model thanks to low depreciation and manufacturer incentives.
New vs used is an individual choice in the end. If you love cars then maybe it is worth it to sacrifice in other areas to buy a brand new one. Maybe a new safety feature came out and you will have more peace of mind with your family in the safer car. It is also possible that the 2-3 year older model you are looking at costs almost the same as a new one. Usually, though, the smartest way to go is to save up and buy a used car with cash.
How to Buy the Car
Cash is king. If you can buy a car with cash, it is almost always a good idea to do so. Using cash requires you to start saving in advance, but can help prevent you from buying too much car. Being strapped with a loan payment is not fun. It also prevents you from being “underwater” on your loan; this can be a real problem if someone hits and totals your car and the insurance company gives you less than you owe. That situation often plays out when someone buys a new car with little money down.
If you don’t buy a car with cash, there are some things to consider.
- Putting enough money down to avoid the car being worth less than you owe can help. If you’re in an accident, you won’t have to pay extra. You can also avoid paying for gap insurance. Gap insurance is a special insurance policy to cover the difference between what you owe, and what the car is worth.
- Don’t spend more than 20% of your monthly take home pay on your car payment, if you have one. Less is better.
- Shop around for a rate. If you apply to multiple places for the same loan, then you can find the best rate you qualify for. This doesn’t even affect your credit score more, since the applications all count as one credit inquiry. Do it all at once, though.
- Check with your insurance company. Financing a car means you must have comprehensive coverage, even if you don’t want it.
There could be some exceptions to buying a car with cash. Not for most people, though. In theory, if you get a rate of 0% on your car loan then you could put the cash in a high yield savings account and make some money on interest. It could also be invested. However, most people won’t do this kind of thing properly. What usually ends up happening is that money gets spent somewhere else.
You should buy a car you can keep for at least 5 years. There’s a reason most frugal people buy a Honda or Toyota; they’re looking for a car that is reliable and cheap to repair. Buying a used BMW probably isn’t a great idea unless you can fix it yourself, as parts and labor aren’t cheap. Buying a very old car risks higher repair costs as well. Most modern cars are fairly reliable, though, so do your research and buy carefully.
After you’ve bought your car, keep it. Most people look to buy a new car every 4-6 years. Cars today are better engineered than in the past and can easily last more than 10 years. Every year you keep your car, you take a smaller percentage of depreciation. It’s also likely your insurance rates will go down as it ages, as well as your property taxes. All of these things work in your favor to give you extra savings each month.