It's no secret, a vehicle can be a costly investment. Not only are you expected to pay for insurance, but you're also responsible for everyday expenses such as gas, repairs, and routine maintenance. That's why so many people choose to purchase a used car. They want to save as much money as they can on the initial investment.
But the question is, how much should you expect to pay for a used car? How cheap is too cheap and how expensive is too expensive? Ultimately, it depends on your specific circumstance. Let's discuss a few tips for determining how much to spend on a used car.
Examine Your Budget
If you want to know how much to spend on a used car, one of the first things you should do is examine your budget. Specifically, you need to consider how much money you have leftover after you've paid all of your monthly expenses. Think about how much spend on expenses such as rent, mortgage, food, utilities, and etc.
Also, how much money do you have in savings? Is it enough to pay off half of the sticker price? Maybe you only have enough saved up for a down payment. The key is to figure out how much you can afford without creating financial hardship.
The good news is that there are countless monthly household calculators online that can offer a clear picture. Simply input all of your fixed and flexible expenses and you'll get an idea of how much you have left for a car payment each month.
Research Your Financing Options
Another factor to consider when determining how much to spend on a used car is financing. You may not be able to afford to purchase the car in full. In this instance, you'll need a loan. And the type of loan you choose will have a huge impact on your decision.
In general, there are four types of auto loans: secured, unsecured, simple interest, and pre-computed. Secured auto loans come with liens. And the lien is removed once the loan has been paid off. If, however, you happen to fall behind in your payments, the car is repossessed. The benefit of a secured auto loan is that the interest rates are typically low and you can borrow large amounts.
Unsecured auto loans don't come with liens. And this means that the lender can't repossess the car if you fall behind in your payments. However, they have higher interest rates than secured loans. The better your credit, the lower your interest rate.
Simple interest auto loans charge interest daily based on your balance. Whenever you make a car payment, part of it will go toward the interest and the other toward the principal. Initially, most of your payment will go toward the interest but as your balance decreases, more will be allotted to the principal. The benefit of a simple interest loan is that they can be paid off early.
Pre-computed auto loans require you to schedule your payments on a pre-determined basis. It's not as flexible as the simple interest loan. Each of your payments will be assigned to a precise share of your interest and principal and paying it off quickly doesn't reduce the interest. The benefit of pre-computed loans is that it accommodates a limited budget.
Apply the 20/4/10 Rule
Even if you have a large amount of leftover in your budget each month, that doesn't mean that it should be the deciding factor. Nor should you base your decision solely on the type of financing that you get. When considering how much to spend on a used car it's best to apply the 20/4/10 rule.
This is a financial principle that requires you to make a down payment of 20%, select a loan that is no longer than 4 years, and choose a car that doesn't exceed more than 10% of your monthly income. The benefit of this rule is that it ensures that your payments are manageable. It also lessens the amount of interest you need to pay and leaves room for financial emergencies.
Explore Trade-In Options
When considering how much to spend on a used car, you should think about how your current vehicle factors into the equation. If you're in the market for a new car because your current vehicle is no longer operational then you may schedule a junk car pick up. There are many lots and junkyards that specialize in buying, selling, and trading junk cars for cars.
There's also a chance that you may be able to get the trade-in value for your old car. And this can be a huge factor in figuring out how much to spend on car purchases. There are several things that can affect the offer your receive.
For instance, the more mileage on your car, the less you should expect to be offered. It matters how well you've taken care of the interior and exterior. They'll also consider the current market value of your vehicle before making an offer.
Consider the Average Cost of a Used Car
Finally, when thinking about how much to spend on car purchases, you should consider the average cost of a used car. According to research, the average cost of both used and new cars has increased in recent years. However, there's still a big difference between the two.
According to Kelly Blue Book, the average cost of a new car was roughly $37,000 in June of 2019. Conversely, the average cost of a used car was roughly $20,000. Since then, the prices for used cars have increased by $2,000.
As you can see, there's no hard and fast rule when it comes to deciding how much to spend on a used car. There are several factors involved--many of which depend on your unique circumstances.
Ask yourself what type of budget you're working with. Consider what types of financing options you qualify for. Apply the 20/4/10 rule. Explore your trade-in options. Also, think about how much the average used car costs.
If you want to know how much to spend on car purchases, then these are the things that you should consider. Ultimately, you need to choose an option that is the best fit for you and your specific needs.