If you’re in the market for a new (or new-to-you) vehicle, you may be in for a bit of sticker-shock. According to Kelley Blue Book, the average price of a new car purchased in June of 2021 was around $42,000, 6.4 percent more than a year ago. Meanwhile, used cars with an average of roughly 68,000 miles now cost more than $25,000.
A number of factors are driving these prices up — supply-chain issues triggered by the pandemic, a shortage of semiconductor chips crucial to modern vehicles and increased demand.
We understand if you’re asking yourself, “Can I afford a car?”
If you don’t absolutely need a car, you might want to consider holding off on the purchase for now — even if it’s just to take advantage of more selection in the future. But the reality is that a car is a necessity for many Americans. If you need one now, here are some general financial considerations to keep in mind while shopping.
HOW MUCH SHOULD YOU SPEND ON A CAR?
Many financial experts recommend spending no more than 15 percent of your monthly take-home pay (read: after taxes, retirement savings, and health insurance premium) on transportation costs.
That 15 percent is for your total auto budget, including car payment, gas, maintenance and car insurance premiums. So the first step is to determine what 15 percent of your monthly take-home pay looks like.
From this number, subtract a realistic estimate for your fuel and car insurance costs (you can use your past experience as a starting point or search online for a relevant calculator). Then subtract another $100 from that number to account for routine maintenance. The amount that remains will give you a good idea of the how much you can afford to spend on a monthly car payment.
UNDERSTAND THE TRUE COST OF BUYING A CAR
The price you see isn’t always the price you pay. That’s because there are many costs beyond the sticker price — these may include sales tax, registration and licensing fees, dealer fees, extended warranty fees, and a vehicle history report.
Meanwhile, many car dealerships sell additional add-ons. While it can be beneficial and convenient to get factory parts added by the dealer, this is one place to do your homework as some add-ons may be available for a fraction of the dealer’s price.
YOUR CAR LOAN
Today, car buyers have the option of auto loans with terms of seven years (or longer). The reason? Longer terms drastically reduce monthly payments. While this can be beneficial if you can lock in a low interest rate, longer terms mean you could wind up paying more in interest over time — especially if you don’t qualify for low rates.
Another potential issue with longer car loan terms is that you may be underwater for a longer period of time — meaning you owe more for the car than it’s worth. According to CarFax, a new car can lose as much as 10 percent of its value in as little as one month after you purchase it, and 20 percent within the first year. By the time the car is five years old, it can lose as much as 60 percent of its original value.
CONSIDER BUYING USED
If you’re questioning your ability to afford a car, another option is to buy used. Because of depreciation, buying a used car can be an excellent means of saving money and reducing your monthly payment, even if you may have slightly increased maintenance costs.
By purchasing a car that’s a few years old, you’ll no longer need to worry about the rapid depreciation that new cars experience. Similarly, you’ll likely save on car insurance and property taxes, as both of these costs are typically tied to the value of the car.