Considering a new set of wheels? Car shopping can spark excitement as you envision cruising in your future ride. However, the stress can quickly mount when you start calculating affordability, dealing with dealership negotiations, and working to avoid costly mistakes.
Don’t worry! Here’s your complete guide to purchasing a car without overspending.
What Does A New Car Typically Cost?
Planning to shop for a brand new, light-duty vehicle? Here are the price ranges you can expect:
- According to PR News Wire, the estimated sticker price of new cars sold in the U.S. was $37,851 as of January 2020.
- Used car shopping offers considerably more affordable options, with prices averaging approximately $20,000.
Unfortunately, many buyers ignore the total purchase price. Auto financing has distorted how people approach buying a car, leading most to focus solely on monthly payments. This mindset creates significant problems.
The Misconception Of Auto Loan Financing
Similar to home mortgages, most buyers cannot afford to purchase a vehicle with cash upfront. For decades, lenders have offered 48-month (4-year) and 60-month (5-year) loans, breaking large purchases into manageable monthly payments to make car ownership accessible.
Today, you’ll find loans extending to 72 months (6 years) and even 84 months (7 years). While longer terms reduce monthly payments, they’re typically poor financial decisions.
Extended loans mean paying substantially more interest over time. You’ll also continue making payments on a rapidly depreciating asset (more details below). Consider purchasing a 5-year-old used car with an 84-month loan—the vehicle might break down before you finish paying for it!
Unfortunately, according to Experian, this lender strategy is working. In the first quarter of 2019, 38% of new-car buyers chose loans of 61 to 72 months, while 32% signed for 73 to 84 months.
Used-car financing follows similar troubling patterns. A staggering 42.1% of used-car buyers select 61- to 72-month loans, with another 20% financing for 73 to 84 months.
Insurance And Registration
Don’t overlook ongoing expenses when budgeting for your car purchase. Insurance and registration costs will impact your finances year after year. Newer vehicles typically command higher insurance rates, while used cars generally carry lower annual expenses.
The Depreciation Of A Car’s Value
Vehicle depreciation represents one of the most critical factors in car buying decisions. Your new car begins losing value the instant you drive off the dealership lot.
Carfax estimates new vehicle values drop by more than 20 percent during the first year, followed by approximately 10 percent annually for the next four years.
Here’s a depreciation example:
- New / sticker price = $37,851
- Value after the first year = $30,281
- Value after the second year = $26,496
- Value after the third year = $22,711
- Value after the fourth year = $18,926
- Value after the fifth year = $15,140
After five years, the vehicle retains approximately 40 percent of its original purchase price.
While luxury cars and high-demand models retain value slightly better, all vehicles experience year-over-year depreciation.
Your Best Car Buying Strategy
Considering these factors, how can you secure the best vehicle without overspending?
Buy Used
The depreciation example above demonstrates why purchasing new vehicles makes little financial sense. Target vehicles that have already depreciated but remain fully functional. Cars aged 3 to 4 years with low mileage and excellent condition offer the optimal value proposition.
Boost Your Credit Score
Never underestimate your credit score’s power when making major purchases or applying for loans.
While achieving a perfect 850 score isn’t necessary, according to Experian, 660 appears to be the crucial threshold. Consider that buyers with:
- Scores below 660 received loans with average interest rates of 7.52% to 14.41% for new vehicles and 10.34% to 18.98% for used cars.
- Scores above 660 secured loans with average interest rates of 3.68% to 4.56% for new cars and 4.34% to 5.97% for used vehicles.
- Scores of 781 or higher qualified for even better rates!
Maintaining good credit pays dividends. Check your score free with Credit Sesame and review your report for errors.
Shop Around For The Best Price
The Internet simplifies finding prices for virtually any vehicle. Use sites like CarGurus or Edmunds to quickly compare dealerships within a hundred-mile radius (or your preferred travel distance).
Invest time in comparison shopping to identify dealerships with genuinely competitive prices. Document details like mileage, condition, model year, engine size, and interior type for each option. Initially higher prices might represent better overall value packages.
Get Pre-Approved For A Loan
Many dealerships offer financing through various banks and lenders to boost sales. However, their rates may not favor you, regardless of your excellent credit.
Shop for your own rates instead. This approach reduces pressure during vehicle purchase and allows easy online rate comparison or working with familiar lenders like local credit unions. Once you’ve found the best rate, apply for pre-approval. You’ll receive a letter to bring to the dealership.
Negotiate A Better Price
Car prices are rarely set in stone. Most dealerships willingly negotiate lower prices, but you must ask! They won’t volunteer discounts. A little assertiveness can yield significant savings.
Pre-approved loans strengthen your negotiation position. Demonstrating serious buying intent may encourage salespeople to reduce prices for guaranteed sales.
Consider Leasing
Want a new car’s appeal without full sticker price? Many people swear leasing offers better value. Consumer Reports analyzed total costs for a 2017 Mazda CX-5 Touring with automatic transmission. After three years, purchasing cost $16,976 out-of-pocket versus just $12,332 for leasing.
Remember that leasing has both advantages and drawbacks. Most importantly, you won’t own the vehicle after lease expiration, unlike traditional purchases. However, considering residual values after depreciation, ownership benefits may prove minimal.
How Much Should You Spend On A Car: Final Thoughts
Car buying can get expensive, but you now understand exactly how much to spend on a vehicle. You’ve also discovered proven strategies for saving money and securing the best deals. Apply this guidance to make smart spending decisions on your next car purchase!
Car ownership brings ongoing expenses like gas, maintenance, and tire replacements. When it’s time for new tires, check out our guide to the best time to buy tires.
