Car Shopping? Budget Tips for Buying or Leasing a Car

Before you start shopping around for a car, either to lease or buy, you need to know your budget. And keep this in mind: "A car is transportation," notes Jim Blankenship, a certified financial planner practicing in New Berlin, Illinois. "It won't make you money, and it won't make you better looking or more popular. It's a practical purchase only if you're getting value for your money. The value provided by a car is mobility."

Determining Your Budget

When you're figuring your budget, your income obviously plays a key role, but it's not the only factor. The less other debt you carry, the larger the portion of your monthly income you can spend on a loan or lease payment. According to Bankrate.com, all of your car expenses should usually be less than 20 percent of your take-home pay -- the amount you bring home after taxes are taken out. That 20 percent is the total for all your cars -- not per vehicle. For example, if you're bringing home $3,500 per month, your total costs shouldn't exceed $700 for all your cars.

Up-Front Costs

The up-front costs for a lease can be significantly lower than the costs to buy a car. According to Edmunds.com, you could drive off a leased vehicle after paying just the first month's payment, a refundable security deposit, registration fees and sometimes local taxes. Purchasing, on the other hand, requires a down payment, sales taxes on the full price of the vehicle, registration fees and other government charges. If you're having a hard time coming up with the cash to buy, it's possible to lease a car and use the extra cash you save toward a future car purchase.

Lease or Loan Term

If you're leasing, once the term is up, you need to find a new method of transportation. Plus, when you turn the car in at the end of the term, you could face additional fees for damages to the car or for going over your mileage limit. One of the benefits to buying over leasing is that once the loan is paid off, not only do you not have to pay for any dings or scratches, but the car is yours.

"In the long run, it's always better to save up the money (or as much as you can) before buying, in order to either shorten up the loan life or just pay cash," according to Blankenship. But, if you are going to finance, Blankenship recommends not taking a term longer than 48 months. At that point, many cars begin to require more repair costs and the salvage value of a four-year old car is pretty low. If you take out a car loan with a longer term, "you'll be upside-down on the loan (meaning the loan is more than the car is worth) pretty much the entire length of the loan. Shortening the loan period can put you in a position of 'less loan than car' early in the loan term, while the car still has significant value."

Budgeting for Extras

Though it's a challenging exercise, Blankenship advises that you consider all of the costs before making a purchase, such as insurance and gas mileage. For example, if you're driving a gas guzzler now but are going to buy or lease a car that gets double the gas mileage, you can expect your annual gas costs to get cut in half -- and that's money that you can put toward other car-related expenses, such as a larger payment if you choose. In addition, your insurance could be higher if you're leasing a car or financing a significant portion of the purchase price because your dealer or bank might require you carry extra coverage, known as "gap coverage," to cover the difference between the value of the car and what you owe on the lease or loan.

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