Buying a car? I’d always heard that your vehicle was a depreciating asset. Outside of classic cars, the joke was always “you lose 50% of the value the minute you drive it off the lot.” Then COVID came along and it seemed that the reverse might be true. Used cars were suddenly appreciating assets.
While the supply chain issues are working their way back to normal, the sticker shock remains. The average new vehicle is coming in just over $45,000. That’s before any interest costs associated with financing. Today’s average interest rate for a new vehicle is coming in at 7%. Loans for used vehicles are coming in even higher.
None of that sounds particularly encouraging if you’re in the market for a new or used vehicle. However, there are still some sound financial tips when it comes to purchasing your next set of wheels. Probably the most important tip would be to shop around. If there are a few different models that will meet your needs, flexibility is your friend. If you have your heart set on a specific trim combination, you may have to be patient and then jump when it becomes available. Using services like TrueCar.com or Cars.com may help in your search to find the best price in your area.
Planning to finance?
You should be shopping around for financing options, as well. Your bank or credit union may be offering more favorable terms than the dealer. Depending on the interest rate you qualify for, you may want be better off paying cash for your car or trying to save up for a larger down payment. Most high-yield savings account are hovering just under 4%. If you end up with the average 7% interest rate loan, you’re now paying a higher interest rate than what you’re earning.
Are you a retiree?
You may be wondering about taking out a lump sum from your portfolio to pay cash. Many people look at this option to avoid having a car payment a part of your monthly budget. In this situation, you’re comparing the average rate of return of your portfolio against the interest rate on a loan as well as the potential tax consequences with pulling a larger lump sum out of your portfolio.
How long do you drive your vehicle?
If you like to swap out your vehicle every few years, it’s entirely possible that leasing could be a better fit for you. Also be mindful of how long of a loan term you’re considering. We are seeing longer-term loans being offered, but just because it’s offered doesn’t mean it’s a good idea. We recommend capping your loan term at the 5-year mark. If you’re having trouble making room for a 5-year loan in your budget, you may wish to keep shopping for a lower-price vehicle or continue to save up for a down payment before making that purchase.
So, what’s the best choice financially?
Yep. It’s that old beater Toyota Corolla, Honda Civic, or equivalent that is reliable but might be missing some paint and more than likely, you would be missing a car payment. If you’re looking for the lowest cost per mile driven that gets you from point A to point B, that’s our recommendation. You may have different priorities, though. You may want more horsepower, safety features, towing capacity, or even more paint on your vehicle. Funding a higher cost vehicle is just fine as long as it fits in your budget and you still have the means to save toward your other goals.
Whatever your priorities are, if you’re buying a car and aren’t sure what to do, we’d be happy to help you explore your options.