How To Budget For Your New Car
According to new and used car retailer Edmunds, the average price of a used car is now $29,594. This is a 30% increase from the same time last year, representing an unprecedented spike. The rise can be attributed to several factors, including the global microchip shortage and the high demand for used cars. In addition, experts warn that the Russian invasion of Ukraine could reduce global production of new cars, thus pushing vehicle prices even higher. Russian vehicle production is inevitably affected by the war, but the ripple effects are likely to be felt across the global market. Rising prices makes it more important than ever to budget carefully if you are considering buying a car.
How Much Should I Spend on a Car?
While the average price of used cars is approaching $30,000, new car prices average out at around $47,000. That said, it’s possible to spend far less or far more on a car, and there are some decent used cars available for under $10,000. To work out how much you can afford to pay for your new car, calculate your monthly income after subtracting payments you may have for existing debt. In general, financial experts recommend capping monthly car-related payments at 10%–15% of your monthly income after subtracting monthly debt repayments.
Of course, if you have enough savings, you may choose to buy a car directly rather than financing it. This will allow you to avoid interest rates associated with loans. However, it is still important to assess your savings carefully and think about your future financial plans when deciding how much to spend on a car. While you may have enough saved up to afford a brand-new BMW, if you would like to make a down payment on a house in the near future, it may not be the best idea.
Hidden Costs of Buying a Car
When budgeting for your new car, do not forget to include all the extra costs that go into buying a vehicle, as they can add up to a significant amount. For example, some states charge a sales tax when you purchase a vehicle, while in some states documentation or dealer fees are common. In addition, no matter which state you live in, you will need to pay a registration fee when you register your new car, as well as a title fee and a fee for your number plate. These costs can easily rack up to upwards of $2500.
When drawing up a monthly car budget, it is also essential to consider the cost of vehicle insurance. Almost every state in the US requires drivers to carry liability insurance. However, to avoid a serious financial shock in the event of an accident, it is recommended that car owners take out collision and comprehensive coverage in addition. Make sure to get a quote for car insurance from several different companies so that you can make an informed decision. If possible, get quotes for the car you are considering before you purchase it, so you can assess whether or not it is within your budget.
Prospective new car buyers come from all walks and stages of life. But whether you are buying your very first car on loan or upgrading to a family minivan or that sports car you’ve always dreamed of, budgeting carefully for your new car is essential.
