Auto Purchase: Vehicle Affordability

Whether you choose to buy a new or used car or other vehicle, you want to determine how much of a car you can afford.  This is an important issue because a car should be a treasured resource not a purchase that treated as if you are a buying a new pair of pants.  Vehicle affordability covers the cost of the car, the cost of the car loan if needed, and the cost using and maintaining the car.

Buying a car means having to pay for it in one of several ways.  You can pay cash, take out a car loan or lease a vehicle.  You may also trade in the vehicle (called a trade-in) you currently own to the auto dealer, who will assign a trade-in value and apply it toward the purchase price of the replacement car.  Generally, the dealer bases the trade-in value on the vehicle’s blue-book value.  There are a number of online web sites who can provide you with an approximate blue book value so that you have some idea of what you will get.  Note:  Most experts believe that you will get a better price selling your existing car on the open market than you will get from a dealer as a trade in.

Even if you trade in your vehicle, a dealer or other lender may still require you to make a cash down payment to obtain the car loan, depending on your credit history and their willingness to bargain.  Affording a car involves more than just paying to buy it or the monthly payment on the car loan, however.  As the owner of a new, you face insurance and registration expenses, as well as maintenance expenses to keep it running and pass any state emission tests. (As a lessee, you generally will not be obligated to pay some of these operating costs.)  These costs can easily exceed $1,000 or $2,000 a year.  You’ll face other costs to operate the vehicle, including cleaning, fuel and parking.

Unless you use rail, bus or an alternative transit system, or simply choose to walk, owning a car is often a necessity in American society.  Doing a cost-benefit analysis which may include reviewing the car loan payment and car loan interest rate is useful when buying a car.  Determining your affordability is a good first step in that analysis.
 
According to the Bureau of Labor Statistics, Americans spend 19.3% of their income in transportation.  That amount is almost the amount they spend on housing and a lot more than they spend in necessities like clothing and food!  The IRS even recognizes the driving you do in a business at 48.5 cents — and don’t expect the IRS to be doing a favor to anyone, it surely is more for the average person.  Purchase cost, taxes, fees, and car loan financing charges are only the beginning of what your car costs.  Gas - $100 a month is not unreasonable these days!
 
Do this kind of analysis for yourself, writing down a realistic figure in each category.
 
Gasoline. – How many miles do you drive each month.  Factoring in work miles and every other kind of driving you do, and taking into account your gas mileage and an average price for gas, you should get a shocking number of some kind.  
 
Scheduled Maintenance - Starts at $30 but some of it reaching $600 for some cars (at the 60,000 milestone).  $50 a month?
 
Unscheduled Maintenance - Normally worn tires, batteries, brakes, hoses are usually not covered by the manufacturer’s warranty as they are expected to wear and tear.  You have to pay them out of pocket.  New tires are around $300 and brake service averages around $200 (a lot more if discs are replaced, less if it is only pads).  $40 a month?
 
Insurance - It is around $900 a year.  Let’s say it is $80 a month.
 
Taxes and Registration Fees - The government always find ways to get their share.  Lets say it is $5 a month.
 
Parking, Tolls - Everyone gets a few cents.  $50 a month?  If you have to pay to park for an athletic event or an appointment downtown, it may be a lot more.
 
Accidents - Deductibles exist and are not free.  Sometimes the insurance just doesn’t cover it because it is lower than the agreed deductible.  And even if it covers it you have an out of pocket expense of around $500.  It doesn’t happen every year.  To some people it doesn’t happen at all.  But chances are every few years someone will bend you a fender.  $20 a month?
 
Things you can do to reduce the cost of owning a car:
 
Drive Less - Less wear and tear, less gas spent and less maintenance needed for items like brakes and new tires.
 
Plan Your Trips - Plan all of your errands to minimize mileage (you will be maximizing time for other activities in the process).
 
Carpool - Try to go to work or to recreational activities using the least amount possible of cars.  And the smallest car that will do the job.
 
Use Public Transportation - Even if the subway costs $2, it is less than the mileage and parking.
 
Telecommute - Ask your boss to let you work from home one day a week. 
 
Compensatory Time- Work longer hours, and don’t go every day to work.  (I used to work for a mortgage company, where this is encouraged:  work 9 days, 80 hours, and take one Friday off every couple of weeks).
 
Maintain Your Car - Not only it will be more fuel efficient, but the depreciation effect will be reduced.  One important tip in reducing the cost of your vehicle is to perform regular maintenance like oil changes.  While it may seem counter intuitive, you can actually save a lot of money by spending a little money along the way
 
Buy a Moderate Car - Don’t rush into getting rid of what you have, but if you have to replace a car, buy a gas saving moderately priced car with slow depreciation.  Finally, depreciation affects the value of your auto when you seek to resell it.  A key to auto finance is that an auto that “holds its value” depreciates at a slower rate.  Thus, a slowly depreciating vehicle tends to have a higher blue-book value than a vehicle that depreciates more quickly. 
 
One final piece of advice.  Having good credit always saves you money in many aspects of your life.  If you finance your car with an auto loan, having good credit will make a big difference in your monthly payment, often cutting the interest portion of your payment in half.  Pay your bills on time, keep balances that are one-third of your total credit, and make payments above the minimum, and you are on your way to reducing your transportation costs.

Tags: auto finance, auto loan, Car loan, car loan interest rates

This entry was posted on Sunday, March 1st, 2009 at 8:43 am and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.