Buying a Car? Read This Financial Advice First

A few years ago when my son was in college, I gave him my old car to drive. Now, four years later, my son has a job and an apartment and uses this same old car to commute. The car is still reliable, but does need a little maintenance, and my son is thinking about buying a new car. He’s asking my advice, so I thought I’d share my advice with everyone. Buying a car is one of the priciest purchases you can make, so it’s definitely a subject that requires some financial advice.

Choosing the right car is very subjective. There are practical, emotional and aesthetical needs. Some people only care about a car as transportation. For some, a car needs to be comfortable. For others a car needs to project the buyer’s personality or be beautiful to look at. For still others, a car is the manifestation of sophisticated technology and needs to look and go fast. I think of a car as transportation, but I also want to be comfortable while I’m being transported. My son wants the car to fit his transportation needs and be fun to drive. When my wife bought her last car, her only need was a place to put her purse that wasn’t on the passenger seat or too far away. So how do you choose?

Make a List

You won’t be happy if you get a car that looks great and goes fast, but can’t fit your family or transport your dog or bottoms out on your driveway. So make a list of the most important transportation criteria and use this as a guide during your search.

Research

I happen to think Consumer Reports is one of the best sources out there for car information. They have a lot of technical information on the cars, and they test drive every one. They collect information from their readers on reliability issues and even have a buying service to help you get a good price. Since they accept no advertising, their advice is unbiased, but remember, their criteria are not necessarily your criteria.

What Can I Afford?

Financially, the best way to buy a car is to buy it new with cash and keep it for a long time, preferably 10 years or more. You can get the best price, you don’t pay any interest and you can sell it at any time. A car is a depreciating asset that doesn’t depreciate in a straight line. New cars depreciate the most when you drive them off the lot. They depreciate rapidly in the first couple of years and then depreciation slows. Keeping your car a long time means the rapid depreciation when the car is newer won’t matter to you.

How much car you can afford is obvious if you’re paying cash, but not if you take out a loan or lease your car. Then you have a monthly payment. Don’t get into any deal that lasts over five years (or 60 months). If you do, you are likely to be under water (where you actually owe more than the car is worth) for at least part of the deal. Sure your payments will be lower, but you are locked in for way too long. Make a realistic budget and include the car payments, insurance and maintenance. Try to keep your debt-to-income ratio less than 15%. You should also be continuing to save 10% or more of your income. If your car payments cause your savings to go away, you’re buying too much car.

If you find that you can’t buy the new car you want, look into a used car. For as little as $2,000 you can get a used car that will take you from point A to point B, and if you spend more you can actually get a nice car. Just remember that any used car will need some maintenance, so put that in the budget. If you buy a used car from a dealer, you might be able to get up to a six-month warranty, but you will definitely pay more than buying from a private party. Always get a Carfax report on any used car you buy. Most dealers will provide it for free, just ask. For a private party purchase you will probably need to buy it. The Carfax report will give you the car’s collision, repair and purchase history.