Enter a showroom and glance at the car of your dreams. You probably can't even see a speck of dust on the polished paint. Open the door and you'll get a whiff of that new car smell, taking you back to the first time you ever sat in a brand-new car. You slip into the leather upholstery, run your hands across the sport-fitted steering wheel, put your hand on the gear shift, and imagine you're driving fast down a narrow road on a summer day.
Then the salesman comes around and tells you it can be yours for only $349 a month. It's a deal!
Wait just a moment, Speed Racer. Step out of your dream world for a second, and reconsider the costs.
A vehicle is a major purchase. Sometimes it makes a lot of sense to get a loan for a big purchase, like a house or even a college education. But, unlike your humble abode or the degree hanging on your wall, purchasing a car is not an investment.
When you buy a home or go to school, you're putting money and effort into something you expect will increase in value over time. Your house's value, if all goes according to plan, will increase before you sell. Your earning power will increase with investments in your skills.
A car, on the other hand, starts to lose value the moment you drive it off the lot. When you borrow money to buy a car, you're paying interest for the privilege of owning something that becomes less valuable while you're still paying for it.
Auto loans have become so common, it may not have even occurred to you that you can buy a car without one. It's true that interest rates for auto loans have been relatively low in recent years. Bankrate reports that the current average rate hovers around 6.88% for a three-year loan. But, why pay any interest on a purchase that will start losing value so quickly?
So, while the salesperson will be whispering sweet nothings about low monthly payments into your ear, it's up to you to figure out the true cost of your vehicle. Some things to consider:
If you're perfectly happy with your little jalopy, start saving now to purchase the next one. It's inevitable that eventually you'll find yourself in the market for a different vehicle, whether new or used. Put some money aside early and you won't be as panicked when the transmission finally falls out of your old clunker. You may even be able to pay for the entire thing up front.
One easy way to start this project is to finish paying off your current car loans, then take that same payment and put it in a savings account each month. The money has already been worked into your budget, so you won't feel the pinch. You can also use this stash of cash for any unexpected car repairs or to pay your insurance deductible, just in case you're in an accident.
If you know you'll soon be in the market for a new vehicle, start saving as much money as possible for a down payment. Even if you have to finance part of the purchase, you'll do better off in the long run if you pay as much as possible up front. You might even decide you can find a decent used car for the amount you've squirreled away for the down payment.
Just for fun (I have some idea of fun, don't I?), play with the auto calculators here at The Motley Fool. Estimate how much money you can expect to pay in interest over the life of your loan. Or, look to the depreciation calculator and estimate the loss in your car's value over its expected life. Any of these numbers getting you a little irritated? Use the mathematics to motivate yourself into throwing an extra few dollars at your car payment each month and pay it off faster.
Some cars lose value faster than others. Often the biggest dip comes during the first year, so buying a newer pre-owned car may be a better idea than buying new. If you're the type who just must have a new car, do a little research into resale values.
One source, the Kelley Blue Book, annually lists the cars with the highest resale value. If the vehicle fits your needs, it may be a great pick when it comes to both buying and selling. That may be evidence of the car's popularity, reliability, or both.
For 2007, Honda's Acura TSX and Honda Civic captured the top spots, as did BMW's MINI Cooper. If you're looking for something sporty, GM's Pontiac Solstice also made the top 10 list. Among rankings by category, Toyota's Tacoma ranked highest among pickup trucks. Of course, resale value isn't the only reason to buy a car. The best resale value may differ in your local market.
While you're pondering all these ideas, ask yourself whether you really need a new car. I mean need, not just desperately want. If the answer's yes, then ask yourself the same question about the myriad bells, whistles, and electronic gizmos you can get for your vehicle. Each one adds to the cost, and each can really add to the cost if you're financing the purchase by borrowing.
Take a spin through some of these articles, too:
- Car Buying: Get the Best Price
- Steer Clear of These 4 Car-Buying Cons
- Tips for Dealing With Car Salespeople
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Fool contributorMary Dalrympledoes not own stock in any company mentioned in this article, and she welcomes your feedback. The Fool has adisclosure policy.