The auto market has finally cooled down. Unlike many things we buy, car prices have dropped since they peaked back in December 2022. That's good news for anyone in the market. If you're weighing a purchase in the near future, here are seven questions that can help steer you to a good decision:
1. Have I Weighed 'Wants' vs. 'Needs'?
Do you absolutely need a new vehicle? If yes, be practical and address current and future needs, such as a growing family, safety, fuel efficiency, plans to relocate, etc. Then buy for the long term. "Drive it until the wheels fall off" is a great approach, but you're not going to do that if you don't make the purchase with a long view.
2. Am I Buying Too Much Car?
No more than 10%-15% of your net income should go to all your transportation expenses. Your car payment(s) will likely make up a large chunk of your transportation outlays. So if you bring home $5,000 per month, spending $1,000 per month on car payments is probably not a winning scenario. If your dream car won't fit, reimagine your plans.
3. How Does My Credit Look?
If you need financing, your credit score will affect interest rates. Review your reports and clean up any mistakes at least six months prior to making a big purchase. The higher your score, the lower your interest rate.
4. What's the Total Cost of Ownership?
Affordability goes far beyond your monthly loan payment. If you're buying a newer or fancier car, your insurance rates will likely rise. Get an estimate on insurance premiums before you sign on the dotted line so you can budget for this ongoing expense. And don't forget to account for anticipated maintenance and gas costs.
5. Does a Pre-Owned Vehicle Make Sense?
Experts estimate that a new car's value drops 20% or more the second you drive it off the dealer's lot. Instead, consider buying a used car, preferably one that's only a year or two old with its warranty still intact. And remember some manufacturers offer "certified" pre-owned vehicles with warranties that can go well beyond the original warranty. It's hard to put a price tag on peace of mind.
6. How Long of a Loan Term Is Acceptable?
The longer your loan term, the more interest you pay. Period. Most cars depreciate on a daily basis, so don't drag it out. Instead make a down payment on the car and finance for as short a term as possible, sticking to a monthly payment you know you can afford. Remember, not all $300-a-month loan payments are created equal. If you can swing a $300 payment, but you have to sign on for a seven-year loan, that likely means you can't really afford the car. But if you purchase a car on a three-year loan with a payment of $300, you won't be overspending.
7. Have I Done My Homework and Secured Financing?
Arrive at the dealership prepared to cut a deal. Know the car you want along with its fair price, and have financing already arranged through a financial institution you can trust. This work -- the research and setting up financing in advance -- will provide solid guardrails and flexibility as you roll in to make your best deal.
A new vehicle is an exciting time. Ensure it's a long-term success by working your way through these questions. Happy shopping.
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