Maybe you just graduated college, or you scored your first “grown-up” job, and now you’re looking for a car that suits your transportation needs. Whatever your situation is, there are a lot of factors to think about before purchasing your first car — the most important one being your budget. Be sure to consider these five things to help you decide whether you can fit the cost of a car into your new monthly budget.
1. Your income
The most important factor that affects your bottom line when it comes to purchasing your first car is your monthly income — especially if you’re buying a brand-new ride. Car payments can be pretty hefty, and if you’re not sure about what you can foot out of pocket each month, it can spell trouble down the line.
It’s a good idea to pay as large a down payment as you can comfortably afford so that you can score lower monthly payments. Experts recommend a down payment of at least 20 percent of the vehicle’s total cost.
Before you head to the dealership, think hard about how much you can realistically budget for your car payment each month, in addition to how much you can set aside for routine maintenance and repairs. Even if you’re buying an older, inexpensive car without a monthly payment, it’s still imperative to have some savings in case issues crop up.
2. Your credit score
If you’re new to this whole “being an adult” thing, you might not have much credit. But establishing a solid credit score is crucial to your car budget, since it directly affects your interest rates when financing your first vehicle. Scoring a good interest rate can save you hundreds — if not thousands — of dollars.
If you don’t have any credit, or you have a credit score that needs some improvement, be wary of dealership salespeople who may try to talk you into a longer financing term. You’ll end up paying significantly more interest over the course of the term, which can negatively impact your future finances.
3. Your financing options
If you’re not purchasing your first car outright, you’ll have to finance it in some way. It might seem strange to shop for loans before you go car shopping, but it’ll give you a better idea of what kind of interest rate and loan amount you can expect once the time comes to secure a financing option.
Compare rates from your bank or credit union to other lenders to see who offers the best option for you. If possible, it’s smart to get pre-approved for financing before you walk into the dealership — that way, you know the cards are stacked in your favor.
If you have little or no credit, you may find that it’s best to wait on your car purchase until you’ve improved your score so that you can get a better interest rate. You’ll be able to better afford your vehicle in the long-term.
4. Your research
While researching cars that you’d like to take a look at and test drive, it’s wise to focus on practicality versus the latest sports car. In other words, prioritize what you absolutely need out of a vehicle rather than what you want. This keeps your car payments lower and helps reduce other ownership costs, such as routine maintenance, repairs and fuel expenses.
Look for vehicles that have a solid track record of safety, reliability and inexpensive maintenance. Reference trustworthy sources, such as Edmunds.com, Kelley Blue Book, J.D. Power and Consumer Reports, to find honest reviews and helpful information.
Make sure you also compare prices across multiple dealerships for each vehicle you’ve got your eye on to ensure you get the most bang for your buck.
5. Insurance rates
Once you’ve narrowed down a list of vehicles to shop around for, call around or go online to compare car insurance quotes for each one. It’s key to incorporate your monthly insurance cost into your budget. Not only is liability insurance required in the vast majority of states, but most lenders also require that you carry comprehensive and collision coverages (a.k.a. “full coverage”) for the life of the loan.
To get the most accurate auto insurance quotes, there are a few pieces of information you should have handy:
- Year, make and model of each vehicle you’re getting quotes for
- Your social security number, which allows insurers to pull your credit-based insurance score
- Your driving record and insurance history (if you have one)
- Your coverage and deductible needs, plus any optional coverages you’d like to carry
- Purpose of the purchase — whether you’ll be using the car for business, commuting or pleasure
- Safety and security features on each vehicle, which can score you discounts
- Vehicle identification numbers (VINs), if possible
- Address where you’ll be garaging the car (usually your home address)
Though this may seem like a lot to consider when deciding how to include your new car purchase in your monthly budget, it’s best to think about these things ahead of time. You’ll be sound in your purchasing decision and sound with your finances — a win-win!
Haden Kirkpatrick is the director of marketing strategy and innovation at Esurance, where he is responsible for all initiatives related to product and service innovation. He manages the annual planning processes for the marketing and service business units. Haden is an innovator who is constantly thinking about how IoT, blockchain and machine learning will impact the insurance industry. He is also a mobile guru, aspiring yogi and mixed martial artist.