Financial Advice for First Time Car Buyers

first time car purchaseMost of us dreamed of that magical day when we would turn 16 and could legally get out on the road.  It’s a very exciting time and you’re anxious to have the freedom to go wherever you want without having to rely on a parent or older sibling to get you there.

If you’ve never owned a car before or are helping someone else through the process, here are a few things to consider as a first time car buyer before making the big purchase.

Know the total cost of car ownership

It’s important to understand that there are many aspects that affect the total cost of owning a new car on top of the price you pay at the dealership.  The biggest factors are:

  1. Financing: Without much of a credit history, you probably won’t qualify for the best interest rates available on a car loan (unless you co-sign).  Each % point your rate goes up can add hundreds of dollars onto the total amount paid over the course of the loan.
  2. Car Insurance:  Young drivers up to age 25 (especially men) have the highest insurance premiums of all age groups (hundreds or even thousands more in annual premiums).  This makes sense when you think about it, newer drivers have less experience avoiding accidents and young men typically drive faster than other demographics.  If you are interested in a sporty car, you can expect premiums to be even higher.
  3. Maintenance Costs: Often overlooked, be prepared to spend money on the basics regularly: tires, oil changes, and brakes.  And for older cars you can count on a lot more “unexpected maintenance and repairs” to keep a car running smooth.
  4. Gas: If you drive just 200 miles a week, get 20mpg, and gas is $2.75/gal (probably not for much longer), you’ll spend $1430 year on gas!

Strongly consider buying a used car

There’s nothing wrong with buying a used car!  Did you know that new cars typically depreciate 20% the moment you drive off the lot?  If you've been saving money for a $22,000 car, that immediate $4,400 loss can hurt!  Teach your kid a good investment strategy and put the extra money into the best 529 plan and buy used. If you do opt for a used car, make sure to order a vehicle history report before you buy.  Saving yourself from a lemon or expensive maintenance is totally worth the $30. Also consider taking the car to a mechanic for an inspection before buying.

Learn how to negotiate

Whether this is your first car or your 5th, make sure you negotiate the best price. More on that here.

How do you get a loan with little or no credit history?

This is probably your biggest challenge.  Some lenders will work with people that have little history or bad credit, but you can expect to pay high rates. If you don’t have the cash to buy a car outright, your best bet may be to get a co-signer for your auto loan.  If you have a parent or relative willing to vouch for your creditworthiness, this is a great option.  In the long run it can also help you build credit if you make your payments on time.  Keep in mind though that if you miss payments, you not only damage your own credit, but the co-signer's as well.

In Summary

Understand the total cost of ownership before deciding if you can afford a new vehicle. Create a budget that includes all your costs and strongly consider buying used. If you opt for a new car, make sure you get online car quotes and negotiate with multiple dealers over email.

And although it should go without saying, please remember to always wear a seatbelt and don’t drink and drive.

Can you think of any other tips we’ve missed?

Photo by Florida Hippy

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