The May 24, 2012, issue of Scientific American examined the recent shift in American public opinion from our initial perception that cars were dangerous to our "love affair with the automobile" over the past few decades. This was brought about by the automobile industry’s concerted effort to change people's psychology to "win the battle for hearts and minds before they could take over streets."
From the time we are old enough to drive, many of us dream of getting our own cars. As teenagers, that dream usually involves financing through the "Bank of Dad" or a benevolent bequest from "Mom Corp." However, as we get older, we find that the expectations, responsibilities, and dynamics change. As youth get into the workforce, they see that it's fun to find the car that fits them to a T. In America we have been brought up — and it's no accident — with the desire, and in many cases, the perceived need, for a brand-new automobile. We want a car that shows the world that we have arrived, that we have status, or that we can afford the latest and greatest car on the market.
Let's talk about buying that first car. When you purchased your first car, the "coolness" factor may have been one of your top priorities along with the color and how quickly you could drive it off the lot. MPG, recall history, environmental impact, and other data were most likely lower on your list. The manufacturer's suggested retail price for a cool car like a 2014 Mazda MX-5 Miata or 2014 MINI Cooper is about $25,000. There are other cool cars that are priced in the $40,000 range and higher.
As an illustration, let's say that you want to put down $3,000 towards a Miata. To fit your budget, you agree to make 60 payments of $401 and use Mazda’s convenient financing right there at the dealership with an interest rate of 3.6%. The result is that you will give Mazda Finance $2,072 in interest over the course of your five-year loan. Perhaps the coolness factor is out of this world for a new vehicle priced significantly higher at $34,000. Again, you have the $3,000 down payment. But now your five-year loan payments are $565 a month, with nearly $3,000 in interest.
You can see where this is going. As you look at your finances and see the amount of money you pay monthly for your car, you'll readily discover that it's a significant portion of your budget. Further, you are paying a lot for that initial convenience of financing at the dealership and reducing your monthly payments by taking a longer loan period.
Let's go back to the dealership. A car salesperson may try to quickly size you up by asking you what color you want or how much you want to pay every month. Two valid questions, but they shouldn't be the first two. One of the most important parts of the buying process is that your "car budget" isn't calibrated by stretching out your payments to make them manageable. Try to get a loan for the shortest term possible. If this means you have to knock off a few points on the coolness scale, so be it. And who can afford to give Mazda all that interest?
Now let's go back to before we get to the dealership. Take a look at how much you bring home each month and deduct your fixed costs (rent, groceries, utilities, etc.) to see what remains. That amount is where you will need to find the money for your car payment, along with savings, mad money, and emergency funds. Perhaps looking at a less expensive new car or a used car would be a better idea.
Too many people today have money problems because they spend too much on a car (just like they can spend too much on a house). Between their monthly car payments and rent, they have little money left for other expenses. In such cases, credit cards and the evil that lurks with the ability to easily charge become an all-too-convenient way to escape their troubles. However, as we know, money trouble doesn't go away. It only grows.
Start your car-shopping experience by doing some research in advance of your trip to the dealership. Look at reviews and ratings to find the best car for the money. A neat-looking car that constantly needs repairs is no deal.
In addition, talk to your bank, or better yet, a credit union, to see what type of auto loans they provide. A credit union will typically have the best interest rate for loans. Have that information ready before you go to the dealership. If you do, you'll know how much you can pay for a car in total and what your monthly payments will be. With this information, you can get a realistic idea of what cars you can truly afford to purchase. Now head to the dealership.
Status and coolness are great, but they don't help when it comes time to pay the bills every month.
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