A client recently reached out and told me his car of 12 years was totaled. He didn’t know how to approach getting another one.
If your work or lifestyle relies on access to a car, acquiring your next one can be stressful given today’s interest rate landscape and recent inflation. Here are some financial considerations and strategies for getting your next car.
Budget
As with all major financial decisions, getting your next car will affect your financial picture, either by depleting cash on hand or by increasing your monthly spend. Before you do research on cars you may want to get, you need to determine your budget and hold firm on that maximum number.
If you’ve got cash on hand but spending more than $20,000 would deplete your emergency reserves, that’s your maximum number. If you need a loan and after reviewing your budget, you know you can only spend a maximum of $600 per month for car expenses, that’s your maximum.
Decide On Non-Negotiables
The client I spoke with had limited auto needs. He doesn’t have small children to cart around, he doesn’t drive through wilderness or snow, and he just needed a car with good gas mileage for his 30-minute morning commute. He wanted a reliable, budget-friendly sedan.
If your lifestyle requires something a little heavier duty, be sure to factor that in before starting your research. Here are some potential non-negotiables to consider:
- Design
- Space
- Safety
- Gas mileage
- Range (if electric)
- Four-wheel drive capability
- Company reputation
Research And Hold Firm
Today, it’s easier than ever to receive accurate quotes for car trade-in values and prices for both new and used cars, often with insurance and maintenance costs factored in. You can generate a full picture of what you expect in minutes.
Unfortunately, most dealerships are incentivized to drive prices up and steer you toward their financing teams. They often use high-pressure sales tactics to cause you to make an emotional decision on the spot, instead of a logically driven financial decision. This arguably is the worst part of the process.
You’ve got your research; you know what the car you’re looking for is worth. Do not let a dealership talk you into a higher price, the wrong color, or extras you don’t need just because you’re getting worn down by the process. It could be worth walking away or going to a different dealer if you’re not getting your way.
Buying A New Car
Frankly, unless you are dealing in collectibles or limited-edition cars, it’s almost never a sound financial decision to purchase a new car. It’s an emotional decision. According to Edmunds, a new car will lose 9% of its value the second you drive it off the lot. It can also lose up to 45% of its total value in the first year of ownership because depreciation happens the fastest early in a car’s lifespan.
If you’re set on a new car, plan to drive a lot, want to keep the same car for a long time and have the money on hand, it will be a better decision to purchase the car outright than to finance it.
Buying A Used Car
Those who opt to buy used cars will generally get the best value for their money, as long as they get that car’s full history and there are no accidents or other red flags. Even used cars are depreciating assets where you’re unlikely to profit off a future sale unless you got a below-market rate to start. Like the new car scenario, if it’s in budget, you plan to have the car for a long time and drive a lot, I recommend purchasing outright in today’s rate environment.
Financing
If it does not fall within your budget to purchase a new or used car, you may want to consider financing that purchase or leasing a vehicle. If you know you plan to finance, you should research rates and terms in advance. A third party might be able to offer you a better deal than the dealership’s finance team. Be sure to read reviews and familiarize yourself with the lender’s reputation instead of jumping at the lowest rate. Securing financing in advance can help smooth out the process at the dealership and save you money.
Leasing
Leasing is a great option for people who don’t drive very often and would like to always have a new car. There is a relatively low upfront cost and you will have a contract to have the car for a specified timeframe, typically between two and five years. The thing that usually holds people back is the fact that many of these leases come with strict mileage requirements and heavy penalties for going over that mileage or returning the car in an imperfect condition. Leasing also typically requires more expensive car insurance, which should be factored into the budgeting equation. Let’s just say if you love road trips, this probably isn’t the option for you.
Conclusion
When it comes to getting your next car, there are several financial considerations and strategies to keep in mind. Ultimately, the right approach will depend on your individual circumstances, preferences, and financial situation. By sticking to a budget, understanding your non-negotiables, and doing your research, you can navigate the process with greater confidence.
This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or car purchasing services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-6607638.1 (5/24)(Exp. 5/26)
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