Your First Car
How much car can you afford?
Create your own personal auto budget! Too many people start shopping for a car without knowing how much they can really afford to spend. Follow these steps to create a budget that will make sure you have enough money to pay for your car—while leaving enough for the other fun things in your life.
1. Create your budget.
Many adults make the mistake of only thinking about the monthly loan payment. In fact, there are two big things to consider when creating your auto budget. You need a plan to deal with the loan payment and the added expenses of gas, maintenance, repairs and insurance.
1. Know Your Income
Determine your regular monthly income and non-regular monthly income.
- Regular monthly income is money you can count on earning/receiving every single month.
- Non-regular income is money that you receive or earn occasionally.
Here are some sources of regular and non-regular income that you may have.
- Exactly how much do you bring home each month from a steady job? If your hours are consistent, count it as regular monthly income. If your hours change from month to month, record the amount you expect to receive most often.
Important tip! If your income varies, be sure to set aside some of the funds you earn in the higher-income months. This will give you a cushion to meet your car expenses in months that you earn less than usual.
- If your allowance will continue for the long term (as long as your car payment — say 2 - 4 years), record it as regular monthly income. If you only receive an allowance sporadically, record it as non-regular income.
Your Odd Jobs
- Do you take on occasional odd jobs like babysitting or mowing lawns? These jobs typically come from neighbors and friends — not employers. Unless you can rely on receiving a specific amount every single month, these jobs usually produce non-regular income.
Holidays and Birthdays
- Holidays and birthdays don’t happen every day and are considered non-regular income.
2. Determine Your Expenses
Take a look at your current personal spending habits. Do be honest with yourself and list what you spend now. You’ll have an opportunity in a moment to think about ways to cut spending. How much do you spend each month for the following items?
- Meals Out – (Breakfast or lunch on school days? Weekly dinner with friends? Also include trips to coffee and ice cream shops, etc.)
- Transportation (Current expenses you expect to have even after your car purchase. Do not estimate future car expenses here.)
Important tip! You may have a regular expense that does not occur every single month. For example: You go clothes shopping with a friend every other month and spend $100. You would record your monthly clothing expense as $50.
If you’re like most of us, you’re probably spending more than you thought! Now take a few minutes to consider ways to cut back current spending. Don’t be too hard on yourself. It’s not realistic to deprive yourself of all life’s little pleasures.
Example: If you currently spend $5, five days a week for lunch, you could save $100 per month by bringing a lunch from home. That could go a long way toward your auto expenses!
Estimate your monthly auto expenses for: gas, insurance, maintenance and repairs
Estimate the number of miles you plan to drive each month and the average gas mileage for the type of car you want.
- You plan to drive 10 miles per day to work, school and recreational activities. That’s about 300 miles per month (10 miles X 30 days).
- If your car gets 20 miles per gallon you’ll need about 15 gallons of gas per month.
If gas is $3.00 per gallon, you’ll need around $45 per month for gas. (15 gallons used X $3.00 = $45)
Insurance for teen drivers is often very expensive, but it’s illegal to drive without it. Cost will vary widely depending on your parents’ policy. Many insurance companies give discounts to students who maintain good grades.
Important tip! Consult your insurance agent before making a final buying decision. Everyone assumes the red sports car will cost more, but sometimes the most popular cars cost just as much. Once you’ve bought it you’ll have to insure it—no matter how much it costs.
Maintenance and Repairs
- Plan on allotting at least $20 per month for maintenance and repairs.
- Your car will need an oil change every 3000 miles as well as other fluids replenished periodically. It will also need washes, tune-ups, tires and other repairs.
- For months in which you don’t use the $20 (or more), put the money in savings. You will need it in the future.
3. Determine Your Down Payment
- A down payment is an amount that you apply toward your purchase when financing a car. If you’ve been saving for a car, you’re several steps ahead of most people. While a down payment is not always required, it sure is smart. The more money you can pay up front, the less you’ll have to borrow. For example: the car you are buying will cost $5000. You have saved $1000 towards your purchase. You give the car dealer $1000 and get a loan for the rest ($4000). The $1000 is your down payment.
You now know how much you can spend on a car! It’s finally time to go shopping (with some great Go! Money advice, of course.)
Getting Started: Where to shop
There are many ways to shop for a car:
- As a credit union member, you can use an auto buying service such as Auto Solution.
- Rivermark has partnered with CUDL (Credit Union Direct Lending) to provide members a car searching service online
- Shop the want ads and purchase from a private party
- Shop dealerships
What kind of car is best for you?
Cool is very important. But you also need to consider safety, insurance and cost to operate. Finding a car you can afford with all the features you need means you’re in for a little homework. Not doing your homework can literally cost you thousands of dollars!
You probably already have an idea of some cars that you would like to own. The first step is to learn more about those cars by doing some research. Some excellent places for online research are Kelley Blue Book (www.kbb.com) and Edmunds (www.Edmunds.com). These sites not only tell you the value of different cars, but they also give consumer reviews, mechanical/reliability reports and shopping tips.
Define Your Search
Once you have an idea of the types of cars that are right for you, create some generally defined parameters to refine (but not restrict) your choices.
Don’t limit your search to a specific color, make and model of a car. Your dream model may or may not be the best available choice when you look at mileage and condition.
There are two important rules you should follow.
Before shopping for a car, make a commitment to follow these two rules. You will save yourself hundreds—maybe even thousands of dollars.
1. Always determine the value of a car before making an offer.
- Get values from Kelley Blue Book and Edmunds. Dealers will frequently offer to give you the Kelley Blue Book price, but they will usually only give you the printout for the retail value. It’s best to do the research on your own and look at the retail, wholesale and other values listed to give you a better idea of the full range of pricing.
- For cars in high demand or limited quantities, you will probably have to pay closer to the retail value. In many cases, a reasonable price is somewhat less than the listed retail value.
2. Decide the reasonable, maximum amount you will pay and do not exceed that amount.
- Give yourself enough time to research the market value of the car. Never be pressured to make an immediate offer.
- Do not pay more than retail value. While it’s possible that certain models command a higher price in your area, you will have a difficult time financing above retail. Also, if the car is wrecked or stolen, the insurance company is unlikely to pay you as much as you paid for the car. Plus, if you decide to trade the car in a year or two from now, you may end up owing more than the car is worth.
- If you’re not comfortable with the final price a dealer is requesting, walk away from the deal.
- Note the condition of the car. Is there anything that the seller should fix or that should reduce the price?
Important Tip! Most dealerships have lists of cars online. You can save yourself a lot of time if you look at the inventory and see if anything fits your search parameters. Call if necessary to get enough details to determine the value.
Important Tip! Once you start working with a salesman at a particular lot, stick with him. It’s not right to have him spend an hour or two with you only to let another salesman on the same lot get the sale.
Walking onto a lot
- Tell the salesman your search parameters. That will save you both a lot of time. Don’t get sidetracked by other vehicles. If the salesman introduces you to a car you hadn’t previously thought of, do your homework and consider adding it to your search.
- Don’t give too much weight to any initial price listed on the window or quoted by the salesman. In general, these “starting prices” are inflated. Remember, the price you pay should always be based on your own homework.
If you see a car that fits exactly what you’re looking for, do give it a test drive. You’ll need to have a parent or other responsible adult along with proof of insurance. It’s also good to have an experienced driver to make sure the car is in good working order.
Important Tip! When you find a used car you’re truly interested in and that you have taken on a satisfactory test drive, do arrange to take it to a mechanic to be checked out. In fact, before you start car shopping, have your mechanic lined up and find out how much they will charge for a diagnostic check.
A test-drive does not obligate you to make an offer. Do not make an offer before you’ve had a chance to do your homework. Once you test-drive a car, some salesmen will want to pressure you into making an offer. Don’t be pressured! It’s your money. Even if that car ends up being sold, chances are there’s another very similar—if not identical—car available in your area
What about financing?
Many people get financing at a dealership because it is convenient. Of course, financing is a profit-maker for dealers. That doesn’t mean you can’t get a good deal, but it is important to negotiate your price before talking about financing.
Important Tip! Negotiating the price on the car you’re buying should always be done first—and separately—from any negotiations on your trade or financing.
Making an offer
There are as many tactics of negotiation as there are cars. You may want to start by making an offer that’s slightly below what you’re willing to pay. No matter what you offer, the seller will almost always come back with a counter offer. In fact, the offer and counter-offer process can sometimes last well over an hour.
Important Tip! Unless you’re absolutely certain that the negotiated deal is right for you, do not sign the paperwork and do not take the car home to “think about it”! That’s called “taking delivery” of the vehicle. Once you do that, you just might find yourself locked in to the deal you’re just “thinking about”.
Beware of the monthly payment!
A good car loan starts with the right purchase price. Salesmen may try to ask you about the monthly payment you can afford. Tell the dealer you are financing with your credit union and that you’re more concerned about the purchase price than the payment.
What about dealer add-ons and extras?
Rust proofing, Undercoating, Security systems, additional warranties… You will probably be offered several extra options that can be added on to the purchase price of your car. These items can also be good profit generators for dealerships. Should you take them? When it comes to “paint-protection” items, probably not. What about that warranty? Some warranties are good—some are not. Your credit union can give you a good idea of what a reasonable amount and coverage would be—or they may be able to offer you a similar product for less. Check it out before you sign!
What if you have a trade-in?
Know the value of your trade by researching the wholesale/trade-in values at Kelley Blue Book or Edmunds. The dealer does incur expenses by taking your car, so you shouldn’t expect retail value for it.
If you have a trade, be sure to negotiate the price of the car you’re purchasing first. Otherwise, the dealer may say you’re getting $5000 for your car that’s worth $2000. That extra $3000 will likely be added right on to your purchase price. Sometimes dealers will work the numbers this way because you owe more on your trade than the trade-in value. If this is the case, you should consider waiting to purchase your new car.
Most dealerships have lists of cars on their websites. You can save yourself a lot of time if you look at the inventory and see if anything fits your search parameters. Rivermark also offers a service to search for available cars online called AutoSMART.
The drive-ups sure have changed over the years!