When it comes time to upgrade to a new car, most people skip straight to picking out their dream make, model, color, and features. They often skip over the most important questions – how much can I afford and how much should I even spend to buy a new car?
There are so many additional costs that come with purchasing a new car. It’s not just the sticker price that you have to account for. What about a down payment, insurance, and ongoing costs?
To help you be better prepared, consider the factors below when determining how much you should spend on a car.
Finances and Budget
While you may already have your heart set on your dream car, you may need to pump the brakes. It might feel great to be driving the latest sports car, but your wallet might not be feeling as good if you can’t comfortably afford it.
As a result, most of us will have to opt for a more modest car with a lower price tag that fits our budget. Start by assessing your finances, including your monthly income, living expenses, existing debt obligations, and savings. This will give you an idea of how much you currently make and how much you spend on necessities.
Depending on how much you have left over, you can determine the amount you can afford to pay in monthly car payments. Be careful, though – just because you may have $500 left doesn’t mean it can all go towards the loan payment. You’ll still need to account for ongoing costs, such as registration fees, gas, and maintenance costs.
Finally, you can’t forget the impact your credit score has on your finances and car-buying options. The higher your credit score, the better your rates will be. As a result, you’ll be paying less in interest. Typically, a score of at least 700 is required to secure competitive rates. Improving your credit score can significantly enhance your financial options.
Total Cost of Vehicle
Once you’ve determined your car-buying budget, you can begin shopping around for options that fit this range. While the sticker price will likely be the most significant cost, there are several additional expenses that you need to consider that will make up the total cost of the purchase.
Here are the factors that will influence the total purchase price of your new or used vehicle:
- Cost of the car and loan: You’ll likely be financing the purchase of your new car, meaning you’ll be paying for it in increments over time. Regardless of your budget, your total loan should not exceed more than 10% to 15% of your monthly income. Typically, the longer your loan term is, the lower your monthly payments will be. However, this is not your final monthly payment amount – interest will bump this amount higher.
- APR: On top of the principal loan amount, you’ll be paying interest. This is where your credit score has a lot of impact. If you have good credit, your rates could be around 5% to 6%. For lower credit buyers, you’ll be looking at double-digit rates. The principal loan plus interest will be combined to calculate a monthly payment amount.
- Down payment: Before you drive off the lot, you’ll be required to pay a down payment. The amount varies but is usually around 10% to 20% of the car’s sticker price. While this is a hefty upfront cost, the silver lining is that it can lower your principal and overall payment amounts. The more you put down, the less you will have to finance. And the less you finance, the less you’ll pay in monthly payments.
- Registration: To even be able to legally drive your car, you need to register it with the DMV. On average, you can expect to pay $60 to $200 a year to register your vehicle.
- Insurance: Most states also require you to have minimum liability insurance to be able to drive your car. This includes bodily injury and property damage protection, which will cost you about $500 to $700. You can always opt for more comprehensive coverage, which will likely double the cost. However, you’ll be more protected. Your car insurance costs will vary by state and insurer, and it will depend on your credit score, driving history, make of the car, and age. On average, your car insurance shouldn’t cost you more than 10% of your monthly income. That’s why it’s best to compare car insurance quotes to make sure you’re getting the best coverage for your buck.
- Gas: Of course, the amount you spend on gas each month is highly dependent on the make and model of the car, gas mileage, and how much you drive. On average, sedans get between 25 to 30 miles per gallon, while SUVs get between 15 and 20. If you get a regular gas vehicle, you’ll be spending around $200 to $300 a month on gas. You could always choose a hybrid or electric car to cut ongoing gas costs, but you’ll be paying a higher sticker price.
- Maintenance: To keep your car in pristine condition, you’ll need to service it annually. Maintenance includes oil changes, tire rotations or replacements, brake replacements, fluid checks, air filter replacements, and battery replacements. On average, maintenance will cost around $350 to $700 a year, based on how much work is needed and whether you have a higher-end make or model. However, don’t forget that unexpected repairs may also be needed, so having an emergency fund of at least $1,000 will be helpful.
Resale and Depreciation
Over time, you may decide to sell your vehicle. You’ll never get the full sticker price back due to depreciation, but there are certain car makes and models that retain value better than others.
Several factors affect how quickly and by how much a car depreciates in value, including the make and model, mileage, condition, and market demand. Additionally, different types of inflation, such as rising costs for parts, labor, and fuel, can also impact the resale value of your car. For example, inflation in material costs might make certain vehicles more expensive to maintain, lowering their resale appeal, while increased fuel prices could drive demand for fuel-efficient models.
Here’s an idea of how a car purchased for $25,000 may depreciate over time:
- An additional $6,000 to $9,000 within the first year
- An additional $600 to $4,200 after two years
- An additional $3,360 after three years
- An additional $1,656 to $2,016 after four years
- An additional $1,808 to $1,714 after five years
However, the following types of cars often retain their value or have higher resale prices because of their reliability and demand:
- Toyota Tacoma: retains around 68% of value after five years
- Toyota Highlander: retains around 64% of value after five years
- Toyota 4Runner: retains around 60% of value after five years
- Honda Civic: retains around 62% of value after five years
- Honda Accord: retains around 60% of value after five years
- Honda CR-V: retains around 61% of value after five years
- Subaru Outback: retains around 63% of value after five years
- Subaru Forester: retains around 61% of value after five years
- Lexus RX: retains around 63% of value after five years
Final Thoughts
Buying a car, whether new or used, is a large investment. While it may be tempting to purchase a high-end vehicle with the newest technology, the costs could really hurt you down the road. The strategies above can help you determine how much you should comfortably spend on a car that is equally affordable as it is luxurious.
