5 Questions to Ask Yourself Before Buying a Car

Buying a new or used car can be a very large expense, and it almost always has a significant impact on your budget. At the end of July, the average transaction cost of a new light vehicle (meaning cars and small trucks) was $35,359, up about 3% from last year. And the average used-car price in the first quarter of 2018 was about $19,657, up 2.2% from the same time a year ago.

With the cost of both new and used vehicles hitting record levels, it's worth taking a few minutes to ask yourself a handful of questions to make sure you're prepared to make such a large purchase. Here are five you should consider:

1. Should I buy new or used?

This may be one of the most important questions to ask before you buy a vehicle, because deciding to buy used could help keep thousands of dollars in your bank account.

Considering that there's a $15,000 difference between the average price of a new and used car, there's little room for debate over what's the better bargain. Not only are you spending more money on a new car, but the vehicle also loses 10% of its value the second it leaves the dealership, and an additional 10% after the first year, according to Carfax. Also consider that buying used means you might be able to get some features in the vehicle (like leather seating, a touchscreen display, etc.) that would stretch your budget if you were buying a new car.

Sure, there are some benefits to buying your vehicle new. It'll likely have fewer miles and you get the full warranty (not to mention that new-car smell). For people who have very long commutes or drive a lot for their work, it might make sense to get a new vehicle. But remember that you can still get the manufacturer's warranty on some cars, even if you aren't the original owner.

Additionally, vehicles last longer than ever (the average age of a car currently on the road is about 11 years), so grabbing one for several thousand dollars less with just a few thousand miles is more than worth it. Sure, you'll lose out on the new-car smell, but that fades after a few months anyway.

2. Is this the right time for me to buy?

No, I'm not talking about taking advantage of end-of-the-model-year deals or holiday sales events. Ask yourself if this is the right time to add a significant car payment to your monthly budget, or to spend a good chunk of your savings.

If your car purchase is anything like mine have been, you might not have much choice as to when you buy. The first time I had to buy a replacement car was when a flash flood overtook my car while I was out of town; the second time was when the engine in my wife's car would randomly turn off and not start back up until it felt like it. In both cases, putting off the purchase just wasn't an option.

But if you do have the choice to decide whether or not to buy a vehicle right now, then it might be best to put it off for a few months while you save up more money. This will give you the chance to make a more substantial down payment or possibly even buy the car in cash.

3. How much should I spend?

There isn't an ideal number for you to spend on a car, but it's wise to keep the 50/30/20 budgeting rule in mind as a loose guide for making your decision. The rule says that you shouldn't spend more than 50% of your income on fixed expenses like your mortgage or rent, smartphone bill, or car payment.

So if you're trying to decide how much car you can afford, make sure that whatever payment you end up with doesn't tip your total fixed expenses past 50% of your income.

You may also want to consider what savings and debt-repayment guru Dave Ramsey suggests. Ramsey's website says that the total value of all your vehicles should never be more than half your annual income. So if you're single and you make $50,000, then your car definitely should not cost more than $25,000.

Just remember that deciding how much you can afford depends entirely on your own personal expenses. Add up all your monthly costs and determine how much money you have left over. Is it enough to cover a car payment? If you already have a hard time covering some expenses, then now might not be the best time to add a car payment.

4. How can I get the best financing deal?

Next, think about all aspects of financing. Buying a car in cash isn't an option for most people, and it might not even be the best idea for your finances, either.

Before you head to the dealership, you need to do your own research to find out what interest rate you qualify for. This is important to do ahead of time because there's no guarantee that the lenders the dealers use will offer you the best interest rate.

Make some online comparisons of interest rates from your bank and local credit unions, and even secure the financing ahead of time if possible. This will not only help speed up the buying process, but will also ensure that you get the best interest rate available to you.

Similarly, be mindful of how long your financing term is. The average length of a new car loan is a whopping 69 months, and the most common length is 72 months, according to Experian. Dragging out your car payments drastically increases the total price of the vehicle. For example, a $20,000 vehicle that's paid for over 69 months at an interest rate of 5% will cost you $23,054 by the time you pay it off.

5. Do I know enough about the vehicle I'm buying?

This might be one of the most overlooked aspects of buying a new or used car. But it could save you thousands of dollars and lots of headaches if you simply spend the time to research the vehicle you want to buy.

When you go to buy a vehicle, don't just think about whether you want an SUV or a truck, or a black car versus a red one. Spend some time finding out whether or not your make and model has a good reliability history. This is easier to do than ever by purchasing an inexpensive Consumer Reports login (some local libraries offer free logins) and doing a quick search for the make, model, and year of your vehicle.

You'll see how the car compares with similar vehicles, how well it's rated by current owners, whether it's recommended by Consumer Reports (it does extensive independent tests on vehicles), and potential trouble spots to watch for.

This information can be invaluable, especially if you're undecided between two vehicles. For example, if one car has a bad rating for its transmission, you might want to go with the vehicle that scored higher in that category. Spending a minimal amount for a Consumer Reports membership could save you thousands in repair costs by helping you buy the right car.

Keep this in mind

No matter which car you buy or how much you end up spending, make sure to go into the purchase with as much information as possible about the vehicle and the financing options. There's nothing wrong with getting the car you want, but you need to know ahead of time what you can afford and how much it'll cost you in the end. Ask yourself the above questions, and you'll be well on your way to staying within your budget and in a much better position to start negotiating.

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