How much should your first car cost?

Whats A Good Budget For Your First Car?

You can expect to spend between $5,000 and $10,000 on your first car. This is the ‘sweet spot’ where you will find the most value. Cars under $5,000 tend to be a lot less reliable, while cars over $10,000 are too expensive for most first-time car buyers.

However, the best budget for your first car is – what you can honestly afford.It’s important that you determine your budget based on your income.

Here are some simple steps to find the right budget for your first car:

  1. Spend no more than 15% of your gross pay, or 20% of your take-home pay
  2. Ensure you can make a downpayment of at least 20%
  3. The maximum loan term for your car should be 48 months

This means if you make $2,500 per month, your monthly car repayment should be no more than $500.

Of course, the higher your income, the newer (and better) the vehicle you can afford.

The compromise: 20% of your income

For me, if I’m going to buy a new car I want something that’s as safe and reliable as possible for my needs. Especially with a young family and two busy working parents, reliability is key — sending the car to the shop all the time would be a hassle.

The last two vehicles I’ve bought have been between two and three years old with around 20,000 miles on them. The newness of the cars was good for their reliability, but the fact that they were used took thousands off the price compared to buying a new one.

“How much car you can afford?” is a different question than “How much should you spend on a new car?”

A loan officer will look at your income and credit report and say, “You can afford $650 a month.” You could finance a new Porsche for $650 a month if they stretch the loan out long enough, but you certainly shouldn’t spend that much on a car.

If you take pride in your frugality, 10–15% of your income sounds about right. If you value the reliability a newer, more expensive car brings, then 20–25% is a good benchmark.

This gets you $5,000 to $7,500 on a $25,000 salary. Still not a lot, but you’ll have more options. At a salary of $50,000, you can spend $10,000 to $15,000, which should be plenty for a basic used sedan under 100,000 miles.

Again, don’t spend more than you can afford. But if you need to finance your purchase, you can compare rates quickly and easily online using Monevo. This site lets you compare loan rates from over 30 different banks and lenders, with personalized loan offers available in as little as sixty seconds.

Comparing different lenders is essential in order to ensure that you get great rates. Monevo is free to use, and it won’t hurt your credit score to check your options.

Read more: Car affordability calculator

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Things to Know About Car Insurance

All cars need to have insurance, so you also need to take this into account when planning your budget. There are several reasons for you to get a decent car insurance.

For one, it’s a legal requirement. If you’re caught driving without insurance, the maximum costs of the fine are unlimited. Plus, you get an extra six to eight penalty points, which brings you much closer to losing your license. Furthermore, you want to be assured that you can pay for any damages caused by you or a third party in case of an accident.

So, car insurance is not something you should save money on, but there are more or less expensive types of insurance. Depending on what level of security you wish to have, you can insure your car on three bases:

  • Third party accidents — covers the damages that you caused to a third party
  • Third party, fire and theft — in case your car gets stolen or catches fire
  • Comprehensive — full package (covers both your damages and those of the third party)

It’s required by law for you to have only third party insurance. However, if you’re a newbie driver, you should think about buying comprehensive insurance anyway.

Step 4: Take a Few Test Drives

While research can help you figure out what’s out there and narrow down your choices, it can’t tell you how it will actually feel to drive the car. A car that looks good on paper won’t necessarily handle as expected. As a new driver, it’s especially important to test drive several models so you can learn how performance can vary from vehicle to vehicle.

Test Driving a Car at a Dealership

A test drive is important whether you’re buying a new car or a used one from a dealer or private seller. If you’re buying from a dealer, you can probably just show up at a time that’s convenient for you. Most people shop for cars on the weekend, so the salesperson may not be able to give you as much time then. It’s a good idea to plan on test-driving a car for at least half an hour so you have a chance to find out how it handles on different road types and in different environments.

Test Driving a Car From a Private Seller

If you’re buying from a private seller, be sure to call ahead to schedule an appointment. When you’re talking to the seller, try to find out as much as you can. Ask about: 

  • How many miles the vehicle’s traveled

  • How long it’s been since it’s had maintenance performed

  • Whether it’s ever been in a crash

  • If anything is currently broken

Don’t feel shy about bringing up items you’re concerned or curious about. After all, if it turns out the car isn’t what you’re looking for, it’s better to know ahead of time so you can avoid wasting the seller’s time.

When you go to test drive a car, we recommend that you bring a parent or other knowledgeable adult along with you (this is especially important if you’re meeting with a private seller). Having an adult with you that’s bought a car before can ensure you’re taken seriously and treated with respect. Moreover, the adult may be able to point out potential issues you may not have noticed.

The Pre-Drive Inspection

When you finally have the car in front of you, perform a pre-purchase inspection before taking it for a spin. Look all around the car for any signs of damage or vehicle problems. 

Remember these tips for inspecting a car you’re thinking of buying:

  • Always check out a car during the day. At night, it will be hard to assess the car’s condition or notice repainted spots that may indicate damage that’s been concealed.

  • Be ready to review everything. Don’t be afraid to get on your hands and knees to check for leaks under the car or to ask to peek under the hood so you can check the condition of the engine, the fluid levels, etc.

  • Use all your senses. Sometimes the only way you’ll be able to notice a problem is by smelling it or hearing it during your test drive.

  • Before you get on the road, adjust the seat, the mirrors and the vehicle controls so you can give your full attention to how well they work. Have the seller talk you through the car’s electronic features and dashboard indicators, then try them out for yourself.

Even if you’ve researched the car already, be sure to also review the window stickers if you’re buying from a dealer. These stickers will give you accurate information about the performance and features of the car you’re looking at. In particular, all new cars are required to have a detailed Monroney sticker attached to the side window with official ratings and benchmarks, specifics about where the car was manufactured and the suggested retail price.

What to Do Before, During and After Taking a Test Drive

Finally, it’s time to take the car out on the road! If possible, use an Internet mapping service to plan a route ahead of time that includes city and freeway driving, curved and inclined roads and roadways with different kinds of traction. That way, you’ll have a chance to see how the car handles in different environments. Let the salesperson know about your plans so he or she can help you have the best experience possible.

During the test drive, be alert for any performance issues that might signify a serious problem. Only by testing the car’s performance can you find out if it will handle well when you really need it to. You may be tempted to proceed with an abundance of caution out of fear of damaging the car, but you won’t learn as much with this approach. This is your chance to find out how quickly the vehicle accelerates and how it responds when you have to brake hard, so don’t be shy about putting the car through its paces. 

With that in mind, don’t do anything illegal or make sudden maneuvers. When you’re test driving a car remember to:

  • Pay attention to how the dashboard is laid out and whether or not you find the vehicle controls awkward or confusing to use.

  • Make sure you’re able to see the road and check your mirrors and blind spots easily.

  • Test the wheel alignment by driving at 20 to 30 mph beside a pavement line or sidewall. 

  • Roll down the window so you can hear if the car is making any unusual noises.

  • Get a rough sense of the car’s fuel efficiency by noting what the odometer and fuel gauge say at the beginning and end of the trip.

  • Identify whether the car responds to steering unexpectedly or seems improperly balanced when you drive.

  • Test any advanced systems, including rearview cameras, blind-spot monitors and voice command systems, as well as essential safety technologies such as ABS or ESC while you’re on the road.

When you’re taking a test drive, it’s a good idea to treat the salesperson as a resource. After all, he or she probably knows about the features of the car as well as anyone and would be happy to demonstrate them for you. Consider asking the salesperson to take the wheel for part of the drive so you can have time to look over the car and discuss it without it distracting you from the road.

The one-size-fits-all rule: 35% of your income

Personal finance is personal, but everyone wants a rule to follow. So, when pressed, I would say spend up to 35% of your annual income on a car.

This covers most bases. If you only earn $20,000 a year, it gives you a budget of $7,000. That’s not a lot, but it’s definitely enough to buy an older yet still reliable used car.

On the other end of the spectrum, someone earning $150,000 a year might spend $52,500 on a new car. That will buy a wide range of brand-new cars, including luxury models. Still, that person earning $150K might be annoyed to be told they shouldn’t buy a well-equipped Tesla Model S for $115K.

This is why I think it makes more sense to break the rule into tiers. Only you can decide which tier is right for you based on your financial situation, whether you’ll pay cash or finance, and how important your car is to you compared to other expenses.

Read more: Can you finance a used car? And what’s the best way to do so?

Conclusion

Buying your first car should not be a hassle, mainly when you stick to this guide. However, you should not just assume that the dealers always have an advantage over you. When you believe that the dealers have a financing edge over you, you will become nervous. 

Dealers may offer fewer financing options, no doubt, but the auto market has become so big that even people with poor credit can get good deals for decent financing. Moreover, a good dealer must be willing to have a satisfied customer who can recommend others to him; hence he will provide you more flexible financing options.

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