It's no secret that Americans love their cars, but do you know the extent? Believe it or not, over 284 million cars are registered in the US,
which is almost one for every person, including children and retirees.
However, no car is as special to us as our first car. Buying a first car is likely the most significant financial decision you'll make to this date, so it's essential to get it right. Let's talk about proper financial planning when buying your first car!
1. Decide on a Price Range
Before you even begin looking at cars, it's important to know your price range. Whether you plan on buying in cash or taking out a loan, you don't want to spend more than you can afford. Let's crunch the numbers.
If you're planning to buy a car worth $10,000 or less, you should expect to buy five years or older. Choosing a 5-year loan with a 5% interest rate would be $175 per month. For a 4-year loan, this would be $218.75 per month.
If you can afford more, let's try the same interest rate on a car worth $20,000. You put down $2,500 and have a 5% interest rate, with a loan total of $18,375. This would be a $306 monthly payment for five years.
However, the average new car now costs $47,000, an all-time
high. For a first car, we'd typically recommend buying used. Either way, whatever you think you can afford, do the math ahead of time and check your current monthly income and expenses to ensure you can afford it.
2. Look at Cars in Your Area
Deciding on the type of car you want is very important for your financial health. A car is likely one of the most expensive assets you own, and they don't last forever. It's important to make this decision with care.
If you don't find a car right away, or if you're not planning to buy a car for a couple of months, that's perfectly fine. It still helps to know the price ranges and what you can afford, especially if you have special needs with the car for work or family
Generally speaking, buying a car that's lightly used is the best financial practice. Cars depreciate the most in their first two years, offering the best value to consumers. The price decreases the most, but the quality doesn't.
However, not everybody can afford to buy a car that's so new, especially the first car. Still, we'd recommend trying to buy within the last 7 or 8 years and doing your research on the type of car you want. Read reviews from owners of that vehicle, especially
older ones, and see what they say.
Some used cars can surprise you, especially if they're well taken care of. For example, Hondas and Toyotas tend to last for a long time, often over 300,000 miles. Buying used doesn't have to mean sacrificing quality, so look into the history of these
vehicles before purchasing.
3. Save for a Down Payment
The more money you put down on your car, the better. For a 5-year loan, every $1,000 you put down will save you $20 a month on your car loan and $60 on interest (with a 6% rate), so try to make the biggest payment you can upfront to save money.
Also, putting more money upfront could mean opting for a shorter-term loan. Having a 4-year loan, especially for a first car, is a great idea. The last thing you want is to roll your loan over to your next car if something goes wrong, so the sooner you
pay it off, the better.
There are plenty of ways to save money for a first car. Getting a part-time job, earning extra money online, or asking for extra hours at work could give you the income boost you need. Alternatively, you could try to create a budget with your current
income to save.
Remember that if you're taking out a car loan, you'll need an extra $150 to $300 each month to make payments, so it's important to learn how to budget anyway. If you're trying to buy a car within the next couple of months, it will make sense to draft
a budget and look for ways to earn extra income.
Create a Budget
We are 42% more likely to achieve goals that we write down, so it's best to
draft an actual budget. If we're thinking, "I need to save money," we might continue our worst financial habits without realizing it. Looking at your current financial situation to make the best judgments is important.
Look at your current bank statement or credit card statement and see where your money is going. Try to prioritize, limit your spending, increase your earnings if possible, and save as much as possible for your down payment.
Break your spending into three categories: needs, wants, and savings. Your needs are utilities, rent, and other basic essentials. It's not always easy to reduce these costs, but you ideally want to keep them under 50% of your budget.
For wants, think of our morning coffees, eating out, shopping on Amazon, and more. These are typically the expenses we can most easily reduce, but it does require some willpower. Ideally, you should keep these under 30%.
For savings, aim to save at least 20% of your monthly income. If you do this, you should have no problem affording a car, even with limited income. If you're a student and don't have these major expenses, try to save as much money as possible, and try
to earn more if possible!
4. Choose a Loan Term
Now it's time to choose a vehicle loan. The most important factors to look for are interest rates and
loan terms. For the latter, this should be entirely up to you, so choose wisely!
Again, it's the best financial practice to pay your loan off as soon as possible. However, in some areas, you can be penalized for paying off a loan too early, so it's important to choose the right loan term ahead of time.
If that isn't the case where you live, it won't be a problem to take out a 5-year loan to give yourself leeway and make bigger payments. Just do your research ahead of time to ensure that it will work out in your favor.
5. Improve Your Credit Score
If you're planning on buying a car soon, that doesn't necessarily mean you don't have time to improve your credit score, especially if it's brand new. If you're young and buying your first car, then consider opening a new credit card before buying the car.
By taking out a new line of credit, spending a little, and paying it off, you'll see a dramatic improvement in your credit score if your credit history is still new.
The difference of 50 or 100 points on your credit score, or the difference between having a credit history or not, could make a significant difference in your loan interest. In the context of a $15,000 car loan, a 1% difference is still $150. You wouldn't
want to spend $150 more on a bike, so why spend it on a car?
If you don't know your current credit score, we don't recommend directly checking, as this can temporarily hurt your score. Hard inquiries into your credit score can last for up to two years. While they'll only drop your score by a couple of points and
likely vanish within a couple of months, it's best to avoid them.
There are plenty of apps that give you an estimate of your credit score for free without doing any damage to your score. They won't be completely accurate, but they will give you a good idea of where you stand. If you're still curious, you can always
ask for a copy of your report when lenders inquire about it for your car loan!
Put These Financial Planning Tips to Use
Now that you have a helpful financial planning guide, you can put these tips to good use and save up for your first car. These tips won't help unless you put them into practice, so draft a budget that works for you, save for a down payment, and choose
the right car!
From there, keep practicing healthy financial strategies, stay up to date with our latest financial tips, and feel free to contact us with any questions or to help you find a car loan that fits your needs!