The price tag of most new and used automobiles can seem daunting. Even a used car, especially a reliable one without mechanical or cosmetic faults, can easily cost $10,000 or more. For first time car buyers, the process of purchasing a car might seem impossible. How do you save up for a purchase of this magnitude? Luckily, auto loans and financing options are designed for first time buyers so they can afford a car at any point in their lives, spreading the payments out over a number of years.
How much do you need to save?
When you start looking for your first car, remember that you will not necessarily need to pay the entire purchase price of the car outright. Cars are financed with something called a “down payment” and then consecutive monthly payments until the car is completely paid off. The more you are able to pay on the down payment, the smaller your monthly payments will be and the less you will end up spending on interest. That said, typically lenders want you to put at least 10% of the car’s final value down to prove that you are serious about the auto loan.
Finding an affordable car loan
After you have saved a bit of cash for the down payment, the next step in your car purchase process is to determine how much you can afford for monthly payments. Monthly payments are a combination of principle (paying off the value of your car) and interest (a sum that the bank charges you to make a profit off of your loan.) To determine your maximum monthly payment, add up all of your incomes and all of your current debt obligations such as rent, credit card payments, etc. Most lenders recommend that no more than 1/3 of your total income should go to debt payments such as auto loans and mortgages.
Tips for Affording your First Car
- Be realistic! Even though you might have your heart set on a brand new Corvette convertible, your financial situation dictates what type of car you can afford. There is nothing wrong with settling for a reliable budget car while you save up money for your dream car purchase.
- Consider buying used. Used cars have already depreciated from their original retail price, so they are much more affordable to purchase. While they might not be covered by manufacturer’s warranties, a bit of shopping around can help you locate a used car that is cheap and reliable.
- If you can’t afford a car, don’t buy a car. You must be completely honest with yourself as to your ability to afford a car. If the numbers aren’t working out, don’t put yourself in more debt than you can possibly handle. Take the bus for a few months, or ask others for rides, but don’t sacrifice your financial future by being too prideful to say no.