Owning a car is liberating, giving you the freedom to go where you want when you want it. For some people, a car is less of a choice but a necessity, especially in cities or countries where public transportation is not very efficient.
Buying a car is a considerable investment for having such freedom cars are expensive not only just to purchase but to insure, run, and maintain. Used cars can be a great idea to purchase to avoid the initial high purchase costs, however, they can end up costing more in the long term from poor resale value and potentially high maintenance and insurance costs. On the other hand, new cars are most likely to cost you more than the average worker's salary.
How much should you spend on a car payment? How can you buy a car without breaking a bank and still be satisfied with your purchase? Should you buy a new car or a used one? And what about loans?
If you want a clear answer to these questions, keep reading. To help you in the process of getting a car, we put together this essential guide about how much you should spend on purchasing a car and what other costs you should consider.
What car should I buy? New vs used
The biggest question you might ask yourself to start is "What car should I buy?", and it makes sense. Of course, buying used cars will save you money upfront but owning a new car has other advantages. So, which one is better?
The simple way to answer this question is to look at the money you would save over time by buying a used car. Think that on average, a person will own 13 cars in a lifetime, each car's price averaging around $30,000. Another thing you must keep in mind is depreciation.
Indeed, your car will lose its value over the years. It is estimated that by the end of the first year of owning your car will lose approximately 30% of its original value.
The impact of depreciation will affect you differently depending on whether you have a new car or a used car. Imagine you bought a new car for $30,000 and then you sell it after 3 years for $15,000. In this case, depreciation costs you $15,000. But if you instead bought a used car for $15,000 and sold it 3 years later for $10,000, the cost of depreciation only amounts to $5,000.
There are some disadvantages to buying a used car. First of all, there is the problem of maintenance and reliability. However, a used car will have lower car insurance rates and lower costs to register.
On the other hand, buying a new car comes with different types of advantages. For example, it will be easier for you to shop for your car, and you'll have more financing options available to you. Generally, a new car will have increased features for your comfort and will most likely be more reliable than a used one.
All in all, the decision will, of course, come down to you. Think about your dreams and consider whether you can afford to buy a new car and all the costs associated with owning one. If you decide to go for a used car, take into account the possible costs that you might have to face over the long term to repair and maintain it, also consider the model you are purchasing and the commonality of parts.
What's the average price of a new car?
Of course, the amount of money you'll spend on a new car will come down to your financial situation and your personal choice. On average, as mentioned before a new car will cost you around $30,000. In the next section, we will look at the price you spend on a car based on your income.
How much should you spend on a car based on your income?
As a rule of thumb, you should never spend anything more than 100% of your income. Generally, it is advisable to spend between 10-15% of your annual income, and if you want to buy the car of your dream you can consider spending 15-30% of your income.
Here's an example for you. Let's say that your annual income is around $60,000. Then you should spend around $9,000 on buying a car. This kind of rule helps you in limiting your finances and prevents you from borrowing more than you need.
Also, because purchasing the car is not the only cost involved in owning a car (you'll also have to think about insurance, petrol, maintenance, and repairs - more on this in the following section), not spending too much on it will leave you some kind of buffer to afford such costs.
By sticking to the rule, you'll have the opportunity to save money in the long run while avoiding pricey rental plans.
What are the added costs to include?
Of course, buying a car is not the only cost involved with the ownership of your vehicle. You'll have to face other expenses. let's look at some of the most common:
Fuel - of course, you need to be able to afford to fuel your car. Petrol is the most common choice, but prices can vary vastly from country to country and even it can differ a lot for different cities. In Perth, for example, you can expect to pay on average 112.2c, while in Adelaide, the average price for unleaded petrol is 103.3c.
Car Service and Repairs - taking care of your car will cost you some money. While new cars are covered by warranty, which might provide you some peace of mind in terms of reparation costs, used cars require frequent maintenance. Take into account such costs when choosing between a new and a used car.
New Tyres- drivers spend on average $151 per tire. That adds up to a total expense of $600 per car. You must ensure that your car's tyres are always in good condition, to avoid ruining your car and reduce the risk of possible accidents.
Car Insurance - good car insurance is important to protect you, your car and assist you in covering possible damages that might occur. Depending on the insurance policy you choose to go for, coverage will be more or less reliable. In general, it is better to spend a bit more on insurance to have the guarantee of being covered when needed.
Roadside Assistance - this cost is generally an optional extra that can be added to your insurance, but you can also purchase it as a standalone product. If your vehicle stops working or won't start due to a technical or mechanical failure, roadside assistance will guarantee you the help you need.
Depreciation - as mentioned before, depreciation has a cost, especially when you are considering selling your car. Keep this in mind when purchasing a new car!
Car Loan - several car loans are available at a fixed rate, however, that can vary based on your circumstances. Look out for loans with lower rates, but also check the application fee and any other additional costs you might incur read more about top tricks and tips for smarter car loans.
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Should you get a car loan?
The answer to this question depends on your financial situation. You should keep in mind that 90% of all car sales are arranged through loans, so if you need one, you should not feel bad about it. What you should be mindful of is the amount of debt you will be carrying with you.
Even though most people use financing to purchase their car, car loans only make up 4.2% of all financial commitments. Assess the amount of debt you have and consider whether or not taking a car loan is convenient and whether it is something you can afford. If this is your first time applying for a car loan make sure you read our complete beginners' guide to how car loans work.
There are several types of car loans, including secured, unsecured, and fixed or variable interest rates. You should investigate the options available to you and assess which one works best for you.
The average car loan size is about $39,445, but the most popular loan size is $20,000. Remember that it is important to keep your level of debt as low as possible. Getting a car loan might be a good idea to reduce the upfront costs you are expected to pay when purchasing a car.
Zaheer is the Founder and CEO of CarClarity, Australia’s first true car loan platform with an easy online application process. Zaheer has over 14 years of experience in senior management and executive positions within the financial space. He founded CarClarity in 2019 to address the unfair gap and lack of transparency he observed in the car financing market, where traditional lenders were commonly placing profit margins over customer outcomes. Zaheer is also an avid car enthusiast who has owned 10 cars in as many years. His passion for cars combined with his industry knowledge provides a unique insight into the car buying and financing space.
Buying your first car is a milestone within a young driver's life. A number of life lessons are thrust upon you and for many this may be the first significant purchase you make. Read our first car buyer's guide to get started.
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