By Alex Perdikis
If you’re like most people, you’re on a budget. And if you need a new car, you might feel overwhelmed. You worry about how to stay within your budget but still find the right car for your needs. You’re probably asking yourself, “Is it possible?” It is possible to find the right car and stay in your budget if you follow these tips.
1. How Much Can You Afford?
You may be on a tight budget but you need to know how much your car-buying budget should be before you start looking at cars.
“Some financial experts recommend your monthly automotive expenses —including car payment, insurance and gas— be no more than 20 percent of your take-home pay.” — Alex Perdikis
That formula doesn’t tell the whole story, however. If you take into account your other expenses, such as utilities, rent or mortgage, loan and credit card payments and other monthly expenditures, 20 percent of your take-home pay may, in fact, be a larger payment than you can comfortably afford.
Unless your other monthly bills are low, use the 15 percent of take-home pay figure as your budgetary limit.
2. A Second Car or a Replacement Car?
If the new car replaces a current vehicle, fine. You’ll probably have to pay a bit more for insurance, which you should of course add in, but gas costs should stay relatively the same or maybe even go down. If the new car is going to be an additional vehicle, you’ll have to add gas, maintenance and insurance costs to your monthly expenses as well.
Add the costs to the 15 percent total you came up with earlier.
3. New, Used or Leased?
The choice of new, used or leased depends on your budget and preferences. Here’s the breakdown:
New car: The highest priced option is new and may seem out of your reach. That may not be the case, however. Buying a new car offers a host of advantages including dependability, the latest safety features and the fact that the car will still be relatively new when your loan is paid off.
Used car: The sticker price and monthly payments for a preowned car will be a lot less than for a new car. You can purchase used cars through private parties, usually for cash in hand without finance options, or your local dealership.
Dealerships may offer certified preowned vehicles that can be a bargain. Certified means the manufacturer warranties the car for a period of time. That means you won’t be out-of-pocket for a big repair right off the bat. Dealerships also offer other used cars as well perhaps with a warranty option or as is.
Sounds great, right? A used car might very well be the right choice for you. But, remember, if you finance your purchase with the typical six-year loan that used car is going to be ancient when you finally pay it off.
Leased car: If you want a new car and can’t quite justify a new car payment, consider leasing. With a lease option, you’ll most likely pay less on monthly payments and you’ll be able to drive a new car after three years. You’ll have to start the lease all over again but if a new car is your dream, that’s not such a big deal.
What to Do?
Which is right for you? If you want to buy a car and keep it for a long time, buy new. If you want to drive a new car every few years, lease. If you can’t make the new car payments, look at used. Above all, stay within the budget you worked out before you started looking for a new car.
Alex Perdikis, Koons of Silver Spring general manager and owner, lives in Chevy Chase with his wife and daughters.