The Four Biggest Mistakes You Make When Buying a Car
How not to ruin your financial future when buying a new car
Your old clunker just bit the dust and while you’re a bit sad that your ride is gone, you’re thrilled that you get to buy a brand new car! Goodbye clunker, hello Porsche 911 Turbo!
Whoa there. Not so fast.
Although we’d all like to have a super fly car, buying one (for us anyway) would mean going without the important things in life… like food. Here are the four of the mistakes people make when buying a car that ruin their budget and crush their financial future.
1. Buying based on the monthly payment
This is probably one of the biggest mistakes people make. You walk in to the dealership and they tell that you can have a car you like for just $400 a month. “Wow,” you think, “I really can buy this car.” What you’re forgetting is the bottom line. Dealers get tricky with their numbers and what seems like a good deal can actually cost you thousands in the long run. In order to get that $400 a month car payment, you may have to have to agree to a longer car loan. A 72-month car loan at $400 a month is nearly $30,000 over the life of the loan. Suddenly, that $400 doesn’t seem like such a bargain – especially if the car is only worth $15,000. A good rule of thumb is not to spend more than 20 percent of your monthly take-home pay on a car payment. Smart people spend less than that and really smart people (who already have built up their credit scores) pay for their cars in full.
2. Not considering used cars
Vehicles help you get to work, school and to the doctor – for many of us, they’re a fun necessity. But what they’re not, is an investment. Every second of every day your new car is going to lose value, so it’s a smart move to consider used cars.
Example: a brand new Toyota Corolla costs about $20,000. Buy a three-year-old Corolla with just a few thousand miles on it and you’ll save about $5,000, if not more.
New might be nice, but used is easier on your wallet.
3. Picking the wrong car for your needs
Porsches aren’t exactly the optimal vehicle for carting your kids around town to their soccer games. Buy one and after a few days of trying to cram your family in to its tiny interior, you’ll be dying to trade it in for something better. But don’t expect to get your money back – your trade-in won’t be worth what you paid for it. Be sure to evaluate your needs and pick accordingly or you could end up losing money.
4. What do you mean “am I putting any money down” on this car?
Those “no money down, no money for the first month” offers on TV might seem like a good idea, but really, you’re going to end up paying for them in the long run. Not putting money down on the car you’re about to buy will cost you in interest for years to come.
For example, let’s say you buy a $20,000 car. If you’ve got an okay credit rating you can expect an okay interest rate – for this example let’s say 10 percent. You’re going to end up paying $424 a month, or about $5,500 in interest for your car. That’s extra money that you don’t have to spend. If you put $5,000 down on your car, this decreases your monthly payment to $318 and you’ll only pay $4,100 in interest. That’s $1,400 in extra cash that you’ll be able to use however you like.
Now that’s smart shopping. Happy car hunting!
