There is no doubt that cars are a major part of our lives. At an early age, we are already dreaming about our first car and what it will be like to drive our friends around our hometown. Unfortunately, the same car that can bring so much excitement and so many good memories can also be the thing that has a major negative impact on our financial future.
The business of selling cars
Auto manufacturers have been very successful at getting us to believe that we have to have the newest model and that the car we drive somehow is an indicator of who we are as a person and how much money we make. They put millions of dollars into making sure that we continue to think this way because if we all stopped buying cars as often and just stuck with the cars we have then they would be in big trouble.
The interest rates and fees that you pay when you are in the market for a new car should be a top priority! Dealerships typically have financing departments that make it easy for them to sell you a car and charge you higher interest rates than you would get from a bank or a credit union because you just test drove a car and you are reacting on emotion. Generally, you will get a much better deal by going to a credit union or a bank. If you walk into a dealership with a pre-approval letter that puts you in a great position because you are not at the mercy of the dealership.
Here are some things to consider when you will be financing a car
Depreciation – a reduction in the value of an asset with the passage of time, due in particular to wear and tear.
New cars depreciate or lose value almost immediately after you drive them off the lot. After the first year, your brand new car will lose around 20% of its value and about 40% of its value after year three.
Interest rate – the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
A good rule of thumb when it comes to interest rates is that you want to be making more in interest from your investments than you are paying out to finance companies. If you have credit card debt and you are financing a car with a higher interest rate than you are making on your investments then you are making a bad decision.
Here is an example of a time when it would make sense to finance a car. Let’s say that you have $20,000 that you have set aside and you are needing a new car. You could go take that $20,000 and pay cash for a car and then you wouldn’t pay interest at all or if you can go finance a car with a 2.8% interest rate and invest that $20,000 into something that will have a return of let’s say 10% then you are making a smart decision.
Auto Insurance – is a contract between you and the insurance company that protects you against financial loss in the event of an accident or theft.
The amount you will pay for your auto insurance is dependent on several factors including your previous loss history and your credit history. If you know that your insurance premiums are likely to be high if you buy a new car because of a recent insurance claim or because your credit scores recently took a hit then you may want to wait on buying that new car until you have had time to fix what you can control to get your insurance premiums back down to an affordable amount. Someone with bad credit on average will pay $100 more per month for auto insurance than someone with good credit. Insurance companies consider someone with bad credit more of a risk than someone with a DUI on their record. Make sure your credit is in good shape before you get a new insurance policy!
Maintenance – the average car maintenance is over $100 per year. When deciding on a new car consider looking into cars that are known for not having mechanical issues or for having expensive parts like with many foreign cars.