Is it time yet to finally buy yourself the dream car you deserve? It might be, or it could be time to treat yourself to something you deserve even more—the car that fits your finances.
The enthusiasm-wilting truth about many dream cars is that the blush of ownership fades long before the payments do. There’s most definitely a time and a place to muscle your way into that hot sports car or sheath yourself in a luxury sedan, but many buyers overlook the financial details that turn these cars from dream ride to ball and chains.
Treating yourself to a fancy car is no treat at all when it saddles you with years of relentless payments that wring your budget dry. And let’s face it: It doesn’t take long for that “Check me out!” set of wheels to turn into “Here I am at the gas station on the way to work yet again” drudgery.
In the long run, the car that does not max out your budget is the one most likely to leave you satisfied now and at the end of the loan payoff.
- What your lender approves you to spend is almost never what you should actually spend. Run the numbers on your budget yourself. If your proposed purchase falls beyond what you can reasonably maintain for the next handful of years, reel in your roving eye.
- The longer the term of your loan, the more you pay in interest and the more money you pay for your car in the long run. In fact, if you finance a new car for longer than four years, it’s likely you’ll end up paying more than the car is actually worth.
- Because a new car loses a large portion of its value (called depreciation) the moment you drive it off the lot, if you purchase an expensive vehicle with no down payment, it’s likely that you’ll find yourself upside down (owing more than the car is worth) as soon as you take the keys in hand.
- Long loan terms (anything over four years) make it difficult or even impossible to trade in your vehicle in a few years. Many car owners like to trade in after three years, but if you’re still paying on a long-term loan, you may not get enough in trade-in value to pay off your loan. Worse, if your car gets totaled in an accident before you’ve paid it off, the amount your insurance pays you could fall short of what you need to pay off your loan.
- Don’t neglect to consider the effects of maintenance and insurance costs over the long haul. Many high-end vehicles cost more than other vehicles to insure, fuel, and maintain. Put pen to paper to sketch out estimated costs, and then add it up for the life of your loan. Are the added costs of maintaining your top-end choice going to sink your budget over time?
Find how much car you can afford
So how can you keep yourself from losing your head (and your shirt) on the car lot? Fall back on the conventional wisdom that’s guided many a buyer to successful new car purchases: 20 percent down for no more than four years (48 months), with payments lower than 10 percent of your income.
Another quick, easy way to get a handle on what works for your budget is to run the numbers in PenFed’s auto loan calculator.
If you find yourself frustrated by the prospect of scaling down your dreams, explore the possibilities of buying used. You won’t lose your shirt through depreciation when you buy a used car. Think classic; chosen and maintained with care, you could find that your vehicle’s value holds steady or even goes up while you own it.
What’s more, used car loans tend to call for shorter loan terms, so it’s less likely you’ll find yourself upside down making payments long after you’ve paid for the car’s actual value. After a year or two of ownership, you won’t be drawing distinctions over which of those odometer clicks belong to you and which belong to the previous owner—you’ll be driving the car you wanted.