Buying a car

When it comes to buying a car, it is a no mystery it should be something that the buyer can afford. Whether it is new or old, the money has to come from some place. When it comes to giving our money, we should be careful with our spending decision. The affordability of the car is one factor that will greatly influence our buying decision.

To understand what it takes to afford a car, don’t just look at the monthly payment or the initial purchase price. Consider other expenses as well in your purchasing decision. If this is your first car, you will realize that owing a car has many operating costs that go beyond just paying for buying it. As any owner of a car, here are some expenses you will encounter:

  • Vehicle safety or registration related repairs
  • Car insurance
  • Car Registration (i.e., titling the car on your name, getting license plates, etc.)
  • Maintenance costs (make of the car makes a big difference in what you pay for repairs!)
  • Fueling costs
  • Cleaning costs
  • Parking costs
Don’t forget on feeding the parking meter costs
Don’t forget on feeding the parking meter costs

Some of these operating costs can easily exceed $2,000 a year. Factoring these costs into determining the affordability is a good first step forward in making a car purchase decision.

If you know you can afford a car, you still have to decide how you will pay for the car. There are number of options in paying for the car:

  • Use a trade-in
  • Pay in cash
  • Take out a loan

Trade-in

If you currently own a car, you can trade it with the dealer. The trading in of a vehicle with the dealer is referred to as trade-in.

A car dealership carrying auto brands such as Audi, Hyundai, and others.
A car dealership carrying auto brands such as Audi, Hyundai, and others.

When you trade-in a vehicle with the auto dealer, the dealer will determine how much money you will get for the car. If the dealer says your car is worth $2,000, the dealer will use that money toward your purchase. In other words, if you are buying a car for $10,000, the dealer will deduct $2,000 from the purchase price. So your replacement car costs you $8,000. Remember a trade-in value is based on vehicle's blue-book value; this value is generally less than what the owner can get by selling the car to a private party.

Car for sale by a private party
Car for sale by owner

If you buy car using a trade-in, don’t think you don’t have to make a down payment. A dealer may still require you to pay some cash as down payment depending on your credit history. A dealer’s willingness to bargain may reduce or eliminate the down payment requirement.

Paying cash for a vehicle

With this option, the buyer pays the full purchase price of the car. This option is attractive because the buyer does not have to worry about making any loan payments in the future. Also, there is no interest expenses associated with this option.

Is there any problem with this approach? It requires the buyer to have cash. Having cash to cover the full purchase price is not always easy. This is why buyers seek loans. Even if the buyer has the cash, it won’t be available for financial transactions if it is used to purchase the car.

Take out a loan

When you take a loan to purchase a car, you commit yourself to paying loan payments for years to come. Most auto loan terms are for 3 to 5 years.

How much will I pay monthly in car payment? Answer to this depends on the loan amount and the loan terms. In general, the monthly payment amount should be less than what the buyer can afford comfortably on monthly basis.

As with any loan, the lender will require a timely payment. If you have the option with online banking, you can set up automatic payments. This will not only ensure payments are made in timely manner but this will reduce the time you spend paying your bills.

If you default on your loan (meaning you stop making payments on your loan), keep in mind this will hurt your ability to use credit in the future.

Posted on 10/19/2007
52,756 views
by Raj Singh