How to Buy a Car Without Going Broke
If you're in the market for a new car, chances are you're aware of the uh, not-so-trivial expenses involved. Just last year, new car prices alone jumped 3.4 percent from the year before across the industry. The good news is it's totally possible to buy and own a car without going net-negative each month. These expert tips can help you reduce your overall loan cost and insurance premiums.
1. Start by determining your monthly budget. It's one thing to overspend on a weekend trip with the girls and have to cut back for a few weeks. It's another to fall in love with a car you can't afford and be imprisoned for years by too-high monthly payments. Avoid that by taking a good look at your monthly income and expenses to figure out how much you can afford to pay for a new car. Then, plug your numbers into an online calculator and work backward, taking into account loan amount, term, and interest rate to calculate your preferred monthly payment.
2. Plan to buy when car prices drop, like late summer. Just like plane tickets, a car's price tag will go up and down throughout the year, so timing your purchase is key if you're looking for the most affordable price you can get. "In my experience, typically a buyer has more leverage toward the end of the month and going into the fall of each year," says Michael Gardon, General Manager, The Simple Dollar. "In the first case, salesmen are more likely to negotiate because they are under the gun to hit their monthly sales targets. In the second case, last year's models are generally being marked down to make room for next year's models.
Of course, this method varies by make and model. "If you're looking at a vehicle that is very popular," he says, "you're unlikely to receive any great deal because there are many people willing to pay up for that car."
3. Overlooking a preowned car could mean missing out on savings. It's a sad fact: A new car loses 9 percent of its value the minute it leaves the lot, and 19 percent in its first year of being owned. If you're looking to maximize the dollars you spend on a new car, search for a current model-year car with a warranty still in place, but returned by a previous owner unable to afford it. You may find the lower sticker price cancels out any depreciation.
4. Don't get hung up over the car with great gas mileage. With a gallon of gas at historic lows - the average nationwide is $1.78 - it doesn't make financial sense to spend thousands more on a car that gets good gas mileage. You can't predict how gas prices will change over the years, but there are ways to ensure that the way you drive is as gas-efficient as possible whether or not you're purchasing a used vehicle or a new hybrid.
5. Be good about your monthly credit card payments-your credit score impacts your car insurance premium. With the average insurance premium at $900 a year (and typically even more for singles and early twentysomething drivers), it makes sense to maintain a good credit score. That's because "establishing a solid credit history can cut your insurance costs," says Loretta L. Worters, vice president of communications, Insurance Information Institute. "Most insurers use credit information to price auto insurance policies. Research shows that people who effectively manage their credit have fewer claims."
6. Search for discounts on car insurance. Look for insurance companies that offer plenty of discounts (many do), such as those for safe driving and loyalty over time. Insurers also like to promote bundling, a term for combining various insurance policies under the same company. "You might combine two car policies to obtain a multi-vehicle discount, or combine your home and auto insurance to obtain even greater discounts," says Gardon.
7. Opt for more liability coverage than your state's minimum requirements to prevent high out-of-pocket costs. Depending on what state you live in, it's likely you're required to buy a minimum amount of liability coverage. If you can swing it, you may want to opt for more than the baseline required. Here's why: Most accidents will cost more than what's covered by your state's minimums, in which case you'd be responsible for paying the difference out of your own pocket.
8. Getting an older car? Save money by calculating your need for collision coverage. On the other hand, "consider dropping collision and/or comprehensive coverages on older cars," says Worters. "If your car is worth less than ten times the premium, purchasing the coverage may not be cost effective."
In other words, if your car is worth only a few thousand dollars, it might make sense to pay for any accident damage out of pocket rather than paying your insurer. Get a few quotes for collision coverage to estimate your expected yearly premium, and if, over the next three to five years, the total is equal to or exceeds your car's value, opt out of collision coverage. Consider setting aside a similar amount for emergency repairs instead.
