After rent, transportation costs are likely your next largest living cost. Your first task in keeping these costs in check is to make a careful decision when you select a new or used car or truck. Other tasks include minimizing the ongoing costs of owning a vehicle.
Identify Your Basic Needs
Before you even think about looking at cars, take time to list your needs and wants. Thinking about your driving habits and where you drive will give important clues. Consider the following:
- How far do you drive each day? The more you drive each day, the more fuel-efficient vehicle you will need. Even if you have a short commute, great mileage will save you money over time.
- How much traffic is there where you drive? If most of your driving is in city traffic, a manual transmission is challenging and can cause unnecessary wear and tear on your clutch and transmission. If most of your driving is on highways, fuel economy is an important concern.
- In what type climate and terrain do you drive most? If you live in a warm climate without harsh weather, you might enjoy a convertible. In a more severe climate or one with harsh terrain, a sports utility vehicle might be your best choice.
After considering these factors, you are ready to decide which auto is right for you. This is where you consider your personal priorities, your lifestyle, and the features you hope to have in your new vehicle.
- What are your priorities as a buyer? You may want a good value for your money. You may want a vehicle that projects the image you seek. You want looking for a safe and reliable vehicle. You may prefer to do thorough research before you buy.
- How will your lifestyle affect your choice? Perhaps performance or style is you biggest concern. If you have a job in sales, you may need something roomy enough for clients. If you use your vehicle to haul or tow, you will need to consider the weight you pull. If you have small children, you need something safe and roomy.
- What features are most important to you? Consider every detail—size, number of doors, number of seats, performance, comfort, color, and towing capacity (if needed). The internet offers sites with easy-to-use decision guides to help you narrow your options quickly. After you cut your choices to a few options, you can use online side-by-side comparisons, which allow you to compare specifications to finer points or features.
Decide How Much to Spend
Next, decide how much you can afford to spend. Start by taking a serious look at your budget. Then, if you already have vehicle, consider whether you will sell it yourself or trade it in and how much it is worth. Finally, consider the total cost of a new vehicle and loan and make sure that you can afford the monthly payments. And, don’t forget to estimate the annual cost of owning the vehicle.
- How much can you afford to spend each month? Take a serious look at your monthly budget before deciding on a specific vehicle. This is your most important consideration when deciding what new vehicle to choose. You need to know what your current vehicle (if you have one) is worth as a trade-in, how much down payment you can afford to make, and how much you can handle for monthly payments. Give these considerations careful thought and be completely honest with yourself. Buying a vehicle that is beyond your means, making only a small down payment, and stretching payments over too many years all lead to problems.
- Will you trade your current vehicle in or sell it yourself? You may get more for your car or truck if you sell it yourself to a private party than if you trade it in. However, you may not want to take the time and make the effort to do so. If your car is in good condition and you have complete service records, you may want to sell it yourself. If it needs major repairs, you might easily spend making them more than you can recover. If you decide to sell your vehicle to a private party, check the Blue Book Private Party value. This is the value you can expect when selling the vehicle to an individual. You will need to prepare your vehicle for sale then set and negotiate a fair price.
- What is the trade-in value of your current vehicle? To find out, check the Blue Book Trade-In Value of your current value. Your vehicle’s condition also affects its value. The dealer will consider the costs of inspections and repairs when making an offer.
- How much can you spend on a new vehicle? You can decide how much you can afford to spend in four fairly easy steps:
Step One: Subtract what you still owe on your current vehicle from its trade-in value then add more to your down payment.
Step Two: Multiply the monthly payment you seek times how many months you want to finance the vehicle then add your total down payment (figured in Step One) to find roughly how much you can pay for a new vehicle.
Step Three: From this figure subtract roughly 10 percent for taxes, license, fees, and other costs.
Step Four: Determine the total costs by the time you pay off the loan in five years. For example, $400 monthly payment times 60 months is $24,000, plus the $10,200 the dealer gave you for your trade-in (less the amount still owed) and the extra $2,000 down payment. This means that you can afford to buy a $27,000 vehicle and it will cost you $34,200 by the time you finish paying for it in five years.
- How much will a loan cost? First, calculate the monthly payment you can afford using an online payment calculator that factors in the interest rate and the term of the loan. Next, add your available cash (trade-in value plus cash down payment) to the loan amount, to help you arrive at a price that works for you. Be sure to check for any customer or dealer incentives available on the new vehicle and add that amount to your available cash amount. Don’t forget to include state tax, license and fees.
- How much will your new car cost? Dealers base new cars pricing on one of three methods:
Invoice Price. The new car pricing report details the invoice price for each trim level. Dealer Invoice is the dealer’s cost for the vehicle only and doesn’t include any of the dealer’s costs for advertising, selling, preparing, displaying, or financing the vehicle.
MSRP. This is the manufacturer’s Suggested Retail Price or “sticker price.” Dealers must by law post the MSRP price on every new vehicle and is usually the highest market price. However, it may be higher if the vehicle is in high demand or has low availability.
Fair Purchase Price Range. You can find available prices for the vehicle in the Kelly Blue Book. These prices are based on purchase data collected across the country. Kelly Blue Book is also a source of information about incentives available on the vehicle of your choice and will bring down the overall price.
Understanding how dealers price vehicles will help you set a target price to use when negotiating the amount you are willing to pay for your new vehicle.
Consider Ongoing Costs
Don’t be surprised by the cost of owning a car. The average owner of a sedan who drives 15,000 miles annually spends nearly $10,000 a year to own and run a car, according to the AAA auto club. Initial costs are what you paid for your vehicle plus tax, title, and license fees. Other costs of owning a car include maintenance, insurance, fuel, tires, and depreciation.
- Maintenance costs rose more than the other costs of owning a car last year to an average of 4.97 cents per mile. These cost estimates include the cost to keep up a vehicle and pay for needed repairs for five years and 75,000 miles, including labor expenses, replacement part prices, and an extended warranty. Last year, the cost of all three increased significantly. Maintenance costs are usually lower for small vehicles and higher for larger ones. As your vehicle gets older, you are likely to face higher repair costs.
- Insurance costs which now average $1,029 per year. AAA’ bases its insurance cost estimates on a low-risk driver with a clean driving record. The value your car and its likely attractiveness to thieves also affect insurance costs.
- Fuel costs now average 14.45 cents per mile for the average sedan owner. The fact that fuel prices are increasing makes fuel efficiency an important consideration.
- Tire costs depend generally depend on the size and quality of the tire you select. According to Consumer Reports, an all-season tire can run $35-$80, ultra-high-performance tires can cost $90-$160, and tires for SUVs and pickups can run $55-$125. While you will only need to replace the tires on your vehicle a few times over the life of the vehicle, this cost is something to consider when you buy your vehicle.
- Depreciation for a mid-size sedan averaged $3,571 last year. The length of time people keep their cars is increasing and now averages 11.1 years. One reason people are keeping their cars longer is the improving quality of cars.
Thoughtful decision-making, careful shopping, and sticking to your budget will result in less stress and greater satisfaction with your new vehicle. Once you have completed the exercises above, you are ready to start searching for the vehicle that will best meet your needs.