New Year Financial Resolution: Buy a New Car

The clock striking midnight to ring in a new year can be that little extra motivation you need to get on track to save for a new set of wheels. However, buying a new car requires more planning than just driving down to the dealership and signing a few papers. Budgeting how much you can afford and shopping for the best deal on financing ensures you'll enjoy your new ride and make payments without a hitch.

How Much Car Can You Afford

An expensive car shouldn't be at the top of your priority list if you don't have your financial house in order. According to Marcio Silveira, founder of Pavlov Financial Planning in Arlington, Virginia, you should be saving 15 percent of your pretax income and have a six-month emergency reserve fund before you consider spending more than $15,000 on a car. If that describes you, Silveira recommends putting at least 20 percent down with a monthly payment you can afford. If you're willing to reduce your budget in other areas, such as housing or entertainment, you can spend a little more on the car, he suggests.

Minimizing Car Costs

If you're still getting your emergency fund together or aren't saving as much, that doesn't mean you can't get a car. However, Silveira recommends minimizing the cost of your new car. He suggests choosing a car that's at least five years old, having two trustworthy mechanics check the car before you buy, purchasing the car from an individual rather than a dealer, and putting down a big down payment or paying cash.

Account for Hidden Costs

When you're budgeting how much money you need to afford your new car, make sure you include the total cost of ownership -- not just the sticker price. For example, Silveira points out that if you purchase a new car and finance it, you have to pay for gap insurance. This protects your lender by covering the difference between the insured value of your car and the amount remaining on your loan. Plus, if something goes wrong that isn't covered by a warranty, you're on the hook for fixing the car. Silveira also points out the hard inquiry from applying for financing could lower your credit score a bit, which could be a consideration "especially if you are about to apply for mortgage financing." If your new car is worth substantially more than your old car, you'll notice a difference in the local property taxes, which, according to Silveira, "can be very high in some jurisdictions."

Shop Around for Financing

Shop around for financing rather than just accepting whatever terms the seller gives you or only checking with one lender. If you do your rate shopping in a short period of time, according to the Fair Isaac Corporation, all the inquiries will count as just one for credit scoring purposes, so your score won't take as big of a hit. And, don't limit your search to banks. "Credit unions generally have pretty good deals," says Silveira. "The dealer may have good deals on the credit side, but the cost of a used car is higher than buying from a private individual."

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