If you’re stuck dealing with an old vehicle that could break down at any moment, or if you need a personal vehicle but you don’t currently have one, you might salivate at the thought of buying a brand-new vehicle. But is this something you can truly afford? And if not, what are the alternatives?
Analyzing Your Budget
First, look at your budget and your current assets. Take a look at your savings and checking accounts; if you use your debit card without thinking (like many Americans), you may have less money than you expect. If you have ample money in the bank—enough to cover any emergency expenses and possibly some set aside for your retirement, you’re likely in a good position to purchase a new vehicle.
You’ll also want to look at your income and your other expenses. How much are you currently earning? What percentage of that income would you consider disposable? What other debts and obligations do you have? The tighter your budget is, and the more additional responsibilities you have, the more cautious you should be when considering buying a car.
Estimating the Costs of Ownership
One of the best things you can do is estimate the cost of buying and owning a new car. You’ll start by determining the average purchase price for a car (which you can find on Kelley Blue Book or something similar), and considering the following:
- Down payment. Most lenders will advise you to put down at least 20 percent of the purchase price of the car. For example, if you’re buying a new car for $20,000, you’ll be expected to put down $4,000 or more. The more you pay, the lower your monthly payments are going to be.
- Interest. You’ll also need to consider the interest rate for which you qualify. The cost of the vehicle, your down payment, and the interest rate will dictate your bottom-line monthly car payment. If your interest rate is exceptionally high, you could end up paying thousands of dollars more than necessary over the lifetime of the loan—so be wary.
- Maintenance and repairs. Many people stop here, but they’re making a crucial mistake. The true cost of owning a car also includes costs for maintenance and repairs. Even the newest, best car on the market is going to need periodic oil changes, and if you drive it regularly, sooner or later, you’re going to experience an issue. You need to be prepared for these ongoing costs.
- Insurance. Also, don’t forget about the cost of insurance. Depending on what type of car you have, your driving history, and your overall risk profile, insurance could cost you several hundred to a thousand dollars a year or more. Does this also fit into your budget?
- Fuel. You’ll also be paying for fuel, and some cars are more fuel-efficient than others. These costs may or may not already be in your calculations.
Finding the Right Model
Much of your decision will depend on what kind of car you want to purchase; these days, you can find a wide range of potential new vehicles, at almost any budget level. However, cost shouldn’t be your only consideration. For example, you’ll also want to pay attention to reliability, safety ratings, and consumer reviews. It’s not worth buying a cheap vehicle if you end up unsatisfied with it in the long run.
Alternatives to Buying New
If you find that a new car would stretch your budget too thin, you can consider one or more of the following alternatives:
- Lease. In some cases, leasing a new car is a more favorable financial decision. You won’t technically own the vehicle, so you won’t be able to resell it in the future, but you’ll likely see lower per-month costs. You also won’t have to pay for repairs in most situations.
- Buy used. It’s often beneficial to buy used since the depreciation rate for new cars is so high. If you buy a used vehicle from a reputable brand, you’ll likely have a highly reliable model. In fact, many people benefit from buying a fantastic car used, rather than a decent car new, due to both cost differences and overall satisfaction.
- Rely on public transportation. It may not be your favorite option, but if your city offers public transportation, you may want to take advantage of it. It’s cheaper and better for the environment.
Depending on your current financial situation, it may or may not make sense to buy a new vehicle for yourself. But don’t worry—there are plenty of alternatives that are almost as good. If you make smart financial decisions now and keep a responsible budget, you’ll eventually be in a place where you can make financial decisions more flexibly—and get the car you’ve always wanted.