6 Essential Tips for Buying a Car on a Budget
Beep beep! Need a new car but don't have thousands of dollars on hand? Don't worry, we've got this.
Buying a new car can be a frustrating process, and the salespeople at the dealership don't always have your best interest in mind. It's important to get a sense of what's available and decide what you're willing to pay before going out for test drives.
My dear friend Chris, the world's greatest pizza delivery man, finally admitted after years of holding his 2001 Grand Am together with pipe cleaners and duct tape, that it was time to sell it for parts. The problem? He relies on a functioning car to do his job, but his income barely supports his comic book habit, let alone the cost of a new vehicle. He's been living off the grid slinging pizzas for his entire adult life, so his credit history is nonexistent. Luckily, he has a savings-savvy friend (me), who was thrilled he'd finally decided to abandon the death trap, and I was ready to step in with some advice.
Newer is better.
Our first stop was Carmax. Chris excitedly pointed to the price tag on a 2006 Kia Rio. "This is the ugliest car I've ever seen! Look how low the monthly payments are!" As it turns out, it was the cheapest car on the lot. The $6,000 embarrassment fit his budget, but I worried he would run it into the ground before he could pay it off.
Choosing an older vehicle, even one that is still low on miles, means more maintenance costs and a lower trade-in value. It also affects your chances of getting approved for a loan. If a lender is not willing to bet that your car will last for longer than the term of your loan, why should you take that chance?
A $500 car is worthless.
Panicking, Chris insisted that we stop by a used car lot and survey all of the junk. "Maybe I can just get something cheap to hold me over a little longer." But the exclamation point stickers on those 1999 eyesores did little to fuel my excitement. Buying a car is an investment, and assessing the financial risks is key. There was nothing to guarantee that these cars wouldn't break down after a few blocks, which would have left Chris with no car and no money for another down payment. If you're shopping for a car and you see the phrases "Cash Only" and "Sold As Is" plastered on the windshield, you should run away as fast as you can.
But you don't need a brand new BMW, either.
The primary goal of a car salesperson is to convince you to spend more money than you originally planned. This starts with the suggestion that you should buy a new car. They'll try to entice you with lower interest rates and a higher chance of credit approval. They'll make the price difference seem negligible, but fail to mention that your shiny new toy will depreciate in value 11 percent the moment you drive it off the lot. After five years, it'll only be worth about 40 percent of what you paid for it.
For example, a brand new 2017 Toyota Corolla will cost you $18,500, about $2,000 more than a used 2015 model. But after about five years of depreciation, these cars will have approximately the same value. So if you choose the used car and decide to trade it in five years later, you'll have saved $2,000, which you can put towards the cost of your next vehicle.
A three to five-year-old car with low mileage is just right.
There are some other benefits to owning an older vehicle as well. You'll be able to check out the maintenance history, so you'll have some evidence of reliability. And you're more likely to find a model without unnecessary bells and whistles, which can help keep the cost down. Just be prepared for the dealer to offer to add them anyway. Chris was offered a color-changing internal lighting system for an extra $5/month.
Do your research before you sign anything.
Chris ended up purchasing a 2014 Nissan Versa with about 40,000 miles on it for just under $9,000. Since it was a certified pre-owned vehicle, we knew it had been inspected by a mechanic, and it included a seven-year warranty. We also checked the Carfax report and found that the car had only one previous owner and no accidents. Knowing that the car had been reliable and was in perfect working condition helped Chris make the purchase with confidence.
Compared to similar vehicles in the area, Chris's Nissan was a steal. You don't have to drive all around town to compare prices: a simple search on Carfax should give you a sense of what's available. Chris took advantage of an opening sale, so the used cars were priced slightly lower than at other dealerships.
Build healthy credit, get a co-signer, or fork over some cash.
If you have good credit, not only will you be more likely to get approved for a loan, but you'll also get a significantly lower interest rate, which will lower your monthly payments. If you have bad credit, you'll either need a friend or family member with good credit to co-sign, or you'll need to throw down a hefty downpayment. The best possible scenario for the lowest cost overall would be a large downpayment and approval with excellent credit, but we can't all be financially responsible adults all the time, now can we?
If you don't have hundreds or thousands of dollars saved up in your bank account, it might be a good idea to make the down payment with a credit card, which offers either a large cash-back bonus offer, or a 0% APR period. "If you want more time to pay off your purchase, take a look at our 0% APR card picks," recommends our editor of travel and finance, Mark Jackson. "But if you have cash on hand to pay your credit card bill on time, you should consider using an airline credit card or a cash back card."
With a little help, Chris was able to drive his red Nissan into the sunset for $500 down and $200/month. As his three cats fought over the front seat, Chris cranked up Run the Jewels, howled for freedom and left the duct-taped Grand Am in the dust forever.