Almost 90% of American households own a personal car. For many, owning a car is an absolute necessity in order to live and work, even with alternatives like vehicle leases and ridesharing services readily available.
However, it’s important to think carefully and critically about purchasing and owning a car before you make this commitment. After all, car ownership may not be suited to your lifestyle or your finances, and you shouldn’t make such a large purchase if you aren’t 100% confident in this decision.
Although it isn’t as large of a commitment as buying a house or taking on student debt, there are still both short- and long-term consequences that you have to take into account. Whether you’re looking to buy your first vehicle or are considering a more eco-friendly lifestyle, here are a few questions you need to ask yourself when thinking about purchasing a car:
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What Type of Car Will I Buy?
First and foremost, consider what type of car you want to buy. You don’t need to know the exact year, make, and model right away, but you should make a few preliminary decisions.
Do you want to buy a new or used vehicle? Do you have a preference between a small sedan or a large truck? What does your budget look like for the down payment, monthly payments, and other recurring expenses? How long do you plan to own this vehicle? Will you be the sole driver, or will you be sharing it with other people in your household?
Additionally, think about what you plan to use the car for. Will you be commuting to work or school? Do you need a lot of room to transport large items or many other people at once? Do you want to earn extra money by driving for Uber or Lyft? Again, you don’t have to know all of the specifics immediately, but you should have a basic idea of what you need from your vehicle and how it will factor into your daily life.
How Will It Affect My Credit Score?
It should be no surprise that when you choose to borrow money for an auto loan, you’ll have to make monthly payments until the loan is paid off. As long as you make your loan payments on time, owning a car will undoubtedly earn you a positive return on your credit score. A good credit score will stick with you as long as you are managing your money well and making good financial decisions, which means it will be easy for you to borrow money again down the line.
You do have to be aware of the amount of interest you’ll be paying on your auto loan throughout its lifetime. A vehicle loan’s APR, or annual percentage rate, measures your yearly interest. An auto loan APR is commonly between 3 and 6 % for people with good credit.
Interest rates on brand new cars can be higher and someone with average-to-bad credit should likely expect a higher APR as well. This number can vary so you’ll want to discuss APR and your credit score with your bank to settle on a number you are comfortable with.
How Much Will I Pay in Interest?
With that said, let’s take a moment to break down a normal APR. Let’s just say that you buy a $10,000 car on a five-year loan, with 5% interest. Five percent of $10,000 comes out to an extra $500 in interest every year, on top of the cost of your loan, until the car is paid off. That’s $2,500, over the course of five years, that you pay the bank just to loan you the money for your car.
This isn’t meant to deter you from getting a car, but you’ll need to understand how interest works before you sit down to sign the papers on your new auto loan. Think of how much you’re spending in interest over your lifetime, especially since interest rates fluctuate and change over time. This might change your mind about the frequency with which you’ll be borrowing money from the bank.
How Will It Impact the Environment?
As more Americans have growing worries about climate change, many are also concerned about the environmental impact that goes along with owning a car. However, there are now more cars than ever that address these major concerns:
- Fuel efficiency;
- Low emissions.
These days, you can find a completely electric car at a decent price, entirely eliminating the nasty emissions and fuel efficiency concerns. If you look at it that way, borrowing money for an environmentally conscious car minimizes, if not erases, two of these three major concerns.
Even if you buy a car, you can minimize the third concern by looking for additional ways to lower your carbon footprint, like making occasional use of eco-friendly commute options and embracing an overall greener lifestyle.
To sweeten the deal, as the law stands currently, energy efficient car owners can receive a tax credit from the federal government just for owning an electric or hybrid car. So, if you really want to buy an electric car, but you’re stuck on the fact that they can be a tad more expensive than their traditional counterparts, you might be in luck. Several cars are eligible for up to $7,500 in credit just for going electric.
Will I Save Money in the Long Run?
Sadly, buying a car just isn’t the same as owning a house or investing in your education. For example, when you buy a home you’re accruing equity with every payment you make toward your mortgage as your home’s value appreciates. When you buy a car, you’re choosing to purchase something that ages — and depreciates in value — much more quickly than a house.
A car is only in great working condition for about 10 years, depending on how many miles you put on it. After your car is about 10 years old, it’s harder to sell because people know that the car will require more work to maintain. So, when getting ready for an auto loan, you’ll need to know that you simply aren’t going to be able to sell it for what you bought it for. You need to be able to see the value beyond the price tag of the vehicle you’re buying.
Owning a car will give you a reliable, convenient mode of transportation for years to come. After it’s paid off you won’t have to worry about monthly payments and you can divert those funds wherever they might be more helpful within your budget. Although, you’re still going to have to account for gas usage and regular tune-ups.
If you’re planning on having your car for years, you’ll also want to be cognizant of repair costs. One of the other benefits of borrowing money on a newer car is the fact that newer cars don’t require very much maintenance. However, once your car begins to age, usually around 100,000 miles, you’ll need to start thinking about more frequent oil changes, tune ups, and overall bigger ticket repairs in order to keep your car in good working shape.
We live in a time where financial crises, technological advancements, and environmental issues make it more difficult to make traditional life investments — including owning a car. While it certainly isn’t impossible, that does mean you shouldn’t make this decision lightly. By carefully considering what you need and asking yourself these questions, you’re ensuring that you’re making the right decision for your finances and lifestyle.
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