How to Develop a Personal Budget to Buy a Car

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How to Develop a Personal Budget to Buy a Car

budget to buy a car

Before you head down to the dealership to check out the latest models, it's important to set a personal budget so you know how much you can afford. "When planning to buy a car (or make any major purchase) keep in mind the purpose of what you're buying," advises Jim Blankenship, a Certified Financial Planner practicing in New Berlin, Illinois.

Buying New Versus Used

When you're setting up your personal or household budget, how much you need depends on whether you're hoping to buy a new or used car. "New cars have the benefit of the factory warranty, and it's a brand new car, so hopefully you won't have any major mechanical problems," says Blankenship. "If you do, you have the protection of the lemon laws in your court."

"Used cars, on the other hand, especially the 'certified' used cars that many dealerships handle these days, are much cheaper and can be very equivalent to a new car," says Blankenship. If you buy a used car, the warranties are typically more limited, and you usually won't be eligible for the same new car financing deals. "Buying a used car from a private individual also carries the problem of just 'buying someone else's problem.'"

Purchasing Costs

The sticker price isn't all you have to worry about paying for before you can drive the car off the lot. You also have to factor in the tags, title and license fees. Registration can run you up to $125 in some states. Plus, you need to add in sales tax. Depending on where you live, that can be quite the kicker. However, if you have an old car to trade in, you might be able to afford a more expensive car. And keep in mind, you probably don't want your total monthly car expenses to exceed about 10 to 15 percent of your monthly budget.

Loan Considerations

Ideally, you'll be able to buy the car outright with money that you've been saving, according to Blankenship. Your down payment should be "as much as possible, to either shorten or eliminate loan payments." Of course, that's not always a reality. Before you set foot in a dealership, consider taking a trip to several banks and credit unions to get preapproved for a car loan. Not only might you be able to get a lower rate elsewhere, but using outside financing allows you to choose any available rebates instead of dealer financing, further lowering your costs. When it comes to choosing your loan term, shorter is better. Though you might be able to get a term of five years or more, which means lower monthly payments (but more interest over the term of the loan), Blankenship recommends budgeting for a 48-month term or shorter so that you minimize the time that you owe more than the car is worth.

True Cost of Ownership

The costs of owning a car don't end once you've paid the dealer and driven the car off the lot. In fact, they're just beginning. "Adding up all of the expenses for a car purchase is a daunting task, but it's important to look at all of the costs," recommends Blankenship. "Will the new car increase my insurance premiums? What is the mileage -- is it better or worse than my current car? What about other maintenance costs?" So, as part of your budgeting process, you should call your car insurance company and find out how your premiums would change. Though you might be driving a safer car, which could help your premiums go down, you're probably going to be driving a more expensive car, which means higher premiums.