It has been said that next to a house, owning a car is the second biggest expense you make. That is probably the reason why more and more people are now choosing to buy used cars rather than new ones. It is a practical choice. It allows you to save a lot of money that you can use on something else. This is why you need to build a budget for used car shopping.
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When you are purchasing something that involves a large sum of money, you need to really think about it many times and the factors that you need to consider. Many people often make a mistake when purchasing a used car. They tend to not know how much they can afford to pay for it. They forgot to consider that there is more to it than the price of the used vehicle. That is why it is vital that you are building a budget for used car shopping. A budget that covers the full cost of owning it.
Here are some of the things you need to consider when building up a budget for used car shopping.
KNOW HOW MUCH YOU CAN AFFORD
Before you set up a budget to shop for a car, you need to know how much you can afford first. It has been a good rule of the thumb that the price tag of the car that you will purchase should be at or below 20 percent of your annual income before tax.
Know and decide how much you can afford by checking your discretionary income. This means you need to know the amount remaining from your income after paying all your commitments or obligations and buying all your needs. This doesn’t mean that you have to spend everything that is left for the car. You don’t want to be deprived from spending some little pleasures for yourself.
After all the computations and deciding how much you can actually spend on a car, you can then choose what car to buy. A used car will be a great option since you will spend less for it which allows you to save more money for everything else as the spending for it doesn’t end by just paying its price. You also have to weigh your choices and find the balance between cost to purchase and cost to own.
The cost to purchase is the actual price of the used car you have to pay and the cost to own is the purchase price plus the cost of operation over the car’s lifespan. It’s like looking at the bigger picture and deciding what makes you save more in the long run. If you purchase an older vehicle, you can save more but the older it gets the more you will have to pay for the repairs and maintenance. Aside from that, you still have to pay for the car’s registration fees and licensing. Then there’s the taxes, fuel, financing, regular maintenance, parking, depreciation, and more.
One factor that people also tend to forget when they are building a budget for used car shopping, is to include the cost of car insurance. The prices for it significantly changes depending on the model you choose. However, there are several ways you can save money on car insurance.
BUILDING A BUDGET
After getting an idea how much you can actually spend, you can now set a budget to shop for a used car. You have to be careful and meticulous with the planning so you can avoid all the stress that comes from paying and spending more than you should if you end up buying a car you can’t afford.
To help you with it, you can use the 20/4/10 rule of thumb in building a budget for your used car shopping. The 20 represents that you have to make sure that you can pay a downpayment of at least 20 percent on the car you want to purchase. Doing so can help you finance the car for 4 years or less. Then you add the total cost of the car every month including the loan, gas, insurance, and maintenance. The total cost should not go beyond 10 percent of your gross income. Using this rule allows you to consider the total amount that you will spend on the loan while ensuring that you can pay a healthy downpayment.
There are also some financial experts that recommend building a budget at half of your annual income. If you are earning $60,000 a year, then you can spend up to $30,000 to purchase a car. While this amount is a good amount to start with, it does not consider the other obligations you have to pay, the financing cost, and the downpayment you have saved up.
If you are one of the frugal spenders, then the 15 percent rule is best for you. This rule allows you to spend less on cars and save more for other important things. This rule states that you don’t spend beyond 15 percent of your monthly income including all your debts and other obligations. For example, your monthly income is $5,000. You get 15 percent of that which is $750. Deduct the total amount of your other obligations from that $750. The remaining sum will be the amount you can spend monthly for a car.
It is best that you protect yourself from overspending by knowing and deciding what you can afford. Car dealers are great at their jobs and they can sometimes persuade you to get the most expensive car they have. Some of them will consider your financial situation and help you find a vehicle you can afford, but others will just want to maximize their profit or commissions. That is why you need to be firm and stick to what you can afford to protect your finances.
LOOK FOR THE RIGHT USED CAR
Shopping for a used car is a lot more challenging than shopping for a new car. You need to consider a lot of factors to choose the right one. You have to find the right model, you have to consider the year, the price, and the location. You also have to check the mileage and the car’s overall condition. You need to ask if it has been regularly maintained and if it hasn’t been crashed or been in an accident.
Fortunately, there are lots of online websites and other means you can use that allow you to research more about used cars. It is an excellent way to start looking for the right used car. You can check what types of cars you can find on any used car lot. You can even research and look for the top used car brands to further help you find a used vehicle that is safe, reliable, dependable and has a great fuel economy. You can compare each vehicle against competitors on each class and price.
Another thing you should consider when you are picking for the right used car is to evaluate why you need the car. You need to select something to focus your efforts on. It is important to consider where you drive, how you drive, how many people you transport, and why you are driving. Should you choose a newer used vehicle with a low mileage and has fewer features or an older one with lots of features and a slightly higher mileage? Match what you want and why you need it with your budget. Start from there and narrow down your search.
DECIDE HOW TO PAY THE CAR
When you have chosen the used car that best fits your taste, your need, and your budget, you need to decide how you will pay it. Deciding how to pay it is a personal choice, but it is advisable to pay it in cash when you can.
If you are building a budget for used car shopping with an intention to pay it in full, you will get to enjoy many advantages. One of which is that you won’t have to make monthly payments. Getting rid of monthly payments can give you a peace of mind knowing that there is no large loan looming above your head for the next few years. Then there’s the stress of thinking about late payment charges, damaged credit, or the fear of getting your car repossessed. Paying in cash also sets you free from interests and lets you save more in the long run.
Paying in cash also makes it easier for you to own the car completely. That means that there will be no restrictions on how you use it. You can make certain modifications to it, you can switch to a less expensive insurance, and you will have the rights to sell it if you need to.
Discounts are also one of the perks of paying in full. There are times where rebates are offered when you pay in cash.
Although paying in cash offers lots of benefits, it doesn’t mean that everyone should do it or can afford it. There are certain situations where opting for auto financing makes more sense than paying in cash. Car buyers that are trying to get a higher credit score will also have to choose the financing option.
If you know that you will choose an auto financing option, you need to secure it before visiting any car dealership. Although some dealerships can have their finance office arrange the financing for you, you would still want to get a pre-approved financing offer if you like to save money. This way, a dealer might beat your pre-approved loan and offer you something better. If you are buying from a private seller, there is no other option but to secure your own financing.
Applying for a used car financing is somewhat different from getting a new car loan. The lenders will tend to give higher interest rates since used cars are more risky than new car loans. This is because a used car’s value is a lot more unpredictable and it is the car’s value that holds as a collateral on the loan.
To ensure that you get the best car financing, you need to explore your options. There are lots of places you can go to secure a used car financing. There are some lenders that work better with the borrowers compared to the others and there are some that offer programs that give low rates or benefits to their loyal customers. Pick the financing that allows you to save more money and demands less hassle.
Useful Tips You Need to Know When Buying a Used Car – Building a Budget for Used Car Shopping
Now you know that building a budget for used car shopping is not as easy as you think, you better spend it wisely so you won’t overspend and get stuck with a car you regret buying.
Get the VIN. When choosing a used car, remember to evaluate it first by getting the vehicle history report. This will help you determine if that car is worth pursuing. If it has too many red flags, better steer clear from it. To get the report, you need to get the Vehicle Identification Number or its license plate.
Don’t assume that all car dealers are nice. If you are spending a lot of money, you better make sure that you are not getting sold short. Make sure to ask questions and inspect the car carefully. Go for a test drive. Going to a used car dealership doesn’t ensure that you will be getting a good deal. Some may try to blind you with talks and such. Although many are honest and helpful, you just have to check the car and its background yourself to be sure.
Don’t pay the initial asking price. The sellers already know that people will try to ask for discounts. For this reason, many will set a price that is much higher than they are expecting to receive. Prepare yourself to negotiate and also be prepared to walk away if you think that you are not getting the right deal for it.
Conclusion
Building a budget for used car shopping the proper way can help you avoid overspending. You will get to avoid being trapped in debts and paying for a vehicle you can’t afford. Be strategic with your approach, study the details, and just take your time. This will help you secure your future and your finances.