For most people, a car is a necessity. We often depend on our vehicles to get us to and from work every day, transport children to events, and even for pleasure. Because they are such an important aspect of your life, you want a vehicle that is reliable, comfortable, and maybe even a bit stylish. The vehicle choices are almost endless, so finding the right combination of wants and needs with an affordable price tag can be challenging.
Here are the 5 biggest mistakes you should avoid when purchasing your next vehicle:
- Thinking in terms of monthly payment. Not very many people walk into a car dealership and plan on writing a check or paying cash for their vehicle, and the salespeople know this. That is why the negotiation almost always revolves around how much you can afford to pay for the car each month. This is the easiest way to spend too much on your next vehicle.
When negotiating a price, the dealer can do a number of things to make almost any vehicle fit your budget. They can do this by adjusting interest the interest rate, offer you a longer term on the loan, or restructure the financing in a way that creates a payment that fits in your budget.
It may not seem like a big deal, but even a few extra percentage points or an additional year on the loan can add thousands of dollars to the total cost of the vehicle.
- Buying new versus used. A vehicle is not an investment. Vehicles depreciate in value quickly, so when you buy a new vehicle, you can expect it to continuously decrease in value. In fact, a new car typically decreases in value by 25%-40% in the first two years. The best thing you can do is to let someone else take the initial 40% hit and buy a slightly used vehicle that is a year or two old.
Years ago, there was a good reason to buy new, and that was for the warranty. Today, most vehicles have longer warranties that can still be in effect even if you buy a car that is a few years old. In addition, you can often opt to purchase an extended warranty which is typically far cheaper than the value the car lost in the first year or two.
- Choosing the wrong vehicle. Are you are single person who needs a vehicle just to get you to and from work every day? Then you probably don’t need that $45,000 SUV that seats eight and can tow 5,000 pounds. You want a vehicle that meets your specific needs. Sure, there are a lot of cars and trucks out there that will turn heads, but keep in mind that this will come at a premium.
- Not taking into consideration other costs. The actual cost of the vehicle is important, but what is often overlooked are all of the hidden long-term maintenance and insurance costs that go along with a vehicle. Keep in mind that car insurance premiums typically increase with the value of a vehicle, so buying a more expensive vehicle will increase your annual insurance costs. This can amount to hundreds, if not a thousand dollars or more per year.
In addition to insurance, you have to take into account all of the maintenance costs. Vehicles need oil changes, new brakes, air filters, tires, and much more. Luxury or performance models are generally going to require higher end replacement parts that can cost much more than their standard counterpart.
Finally, you need to consider gas consumption. The average person will drive between 10,000 and 15,000 miles per year. A vehicle that gets an average of 30 miles per gallon with today’s gas prices, you can expect to spend between $1,000 and $1,500 per year on gas alone. Now, consider a vehicle that only gets about 15 miles per gallon. Now you’re spending $2,000 and $3,000 each year.
When you think about it, by the time you factor in gas, oil changes, insurance and regular maintenance, you can expect to spend $3,000 to $5,000 in addition to your monthly car payment each year!
- Putting $0 down. There are a lot of incentives when it comes to buying a car, and you can often put yourself in a brand new vehicle of your choice with no money down. Sounds great, right? Not so fast. Remember, vehicles depreciate rapidly, so if you finance the full purchase price, you often find yourself upside down on the loan immediately.
Being upside down simply means that you owe more than the car is worth. Remember, there are taxes and other fees that go into a new car purchase, and they are typically rolled into the loan if you don’t put anything down. That means as soon as you drive it off the lot, you owe more money to the bank or dealership than the vehicle is actually worth.
This is a very bad idea if you intend on selling or trading the car in before the loan is paid off. If after three years you need to get a new vehicle and you owe $10,000 while the car is only worth $8,000, you will have to either pay $2,000 out of your pocket, or finance that into your new loan. It may feel good to walk out of the dealership with a brand new car without having to fork over a dime up front, but it will cost you.