A client recently reached out and told me his car of 12 years was totaled. He didn’t know how to approach getting another one. If your work or lifestyle relies on access to a car, acquiring your next one can be stressful given today’s interest rate landscape and recent inflation. Here are some financial considerations and strategies for getting your next car.
As with all major financial decisions, getting your next car will affect your financial picture, either by depleting cash on hand or by increasing your monthly spend. Before you do research on cars you may want to get, you need to determine your budget and hold firm on that maximum number. If you’ve got cash on hand but spending more than $20,000 would deplete your emergency reserves, that’s your maximum number. If you need a loan and after reviewing your budget, you know you can only spend a maximum of $600 per month for car expenses, that’s your maximum.
The client I spoke with had limited auto needs. He doesn’t have small children to cart around, he doesn’t drive through wilderness or snow, and he just needed a car with good gas mileage for his 30-minute morning commute. He wanted a reliable, budget-friendly sedan. If your lifestyle requires something a little heavier duty, be sure to factor that in before starting your research. Here are some potential non-negotiables to consider: Design, Space, Safety, Gas mileage, Range (if electric), Four-wheel drive capability, Company reputation.
Today, it’s easier than ever to receive accurate quotes for car trade-in values and prices for both new and used cars, often with insurance and maintenance costs factored in. You can generate a full picture of what you expect in minutes. Unfortunately, most dealerships are incentivized to drive prices up and steer you toward their financing teams. They often use high-pressure sales tactics to cause you to make an emotional decision on the spot, instead of a logically driven financial decision. This arguably is the worst part of the process.
Frankly, unless you are dealing in collectibles or limited-edition cars, it’s almost never a sound financial decision to purchase a new car. It’s an emotional decision. According to Edmunds, a new car will lose 9% of its value the second you drive it off the lot. It can also lose up to 45% of its total value in the first year of ownership because depreciation happens the fastest early in a car’s lifespan. If you’re set on a new car, plan to drive a lot, want to keep the same car for a long time, and have the money on hand, it will be a better decision to purchase the car outright than to finance it.
Those who opt to buy used cars will generally get the best value for their money, as long as they get that car’s full history and there are no accidents or other red flags. Even used cars are depreciating assets where you’re unlikely to profit off a future sale unless you got a below-market rate to start. Like the new car scenario, if it’s in budget, you plan to have the car for a long time and drive a lot, I recommend purchasing outright in today’s rate environment. If you know you plan to finance, you should research rates and terms in advance. A third party might be able to offer you a better deal than the dealership’s finance team.
Leasing is a great option for people who don’t drive very often and would like to always have a new car. There is a relatively low upfront cost, and you will have a contract to have the car for a specified timeframe, typically between two and five years. The thing that usually holds people back is the fact that many of these leases come with strict mileage requirements and heavy penalties for going over that mileage or returning the car in imperfect condition. Leasing also typically requires more expensive car insurance, which should be factored into the budgeting equation. Ultimately, the right approach will depend on your individual circumstances, preferences, and financial situation. By sticking to a budget, understanding your non-negotiables, and doing your research, you can navigate the process with greater confidence.
