Planning Ahead: Owning a Car on a Budget

Owning a car can be expensive. Sometimes, you'll think you've discovered a life hack by private-purchasing a dirt cheap, years-old vehicle that costs a quarter of the price of a dealer's used vehicle. But what happens when you try to get insurance on that vehicle or when it ends up costing you thousands each year in repairs? On the other hand, a brand-new vehicle can sometimes feel like it will break the bank with the down payment alone, plus interest on the loan, insurance, maintenance, and everything else.

It can be difficult to figure out how you can afford a vehicle, whether new or used, even if you qualify for a subprime auto loan. Owning a car costs money over time, no matter how you cut it. But there are ways to budget appropriately and make sure that your purchase fits within your budget, suits your needs, and doesn't become a financial burden.

We want to help you consider the whole costs of car ownership and how to budget in a way that doesn't lead to surprises, thus helping you reasonably achieve your automotive and financial goals hand-in-hand. These tactics take discipline and prudent planning, but if you stick to them, you may find that it's not as difficult as you thought.

Loan Payments

Most of the time, you are not going to be paying for the entire vehicle with a down payment. Therefore, you will need to take out a loan. Doing so means that the loaning party provides you with the money to purchase the vehicle from the dealer, and you then pay them back via monthly payments. The loan term is decided beforehand, and you may see a range of options depending on the model, the loan amount, and your credit history. Some loan terms may be as low as 36 months; others are 60 months, and still others are 72 months.

The loan also has a predetermined interest rate. This is why you will want to really carefully discern your options and not simply jump at the first opportunity that comes along. You're not simply paying back the amount loaned; you are paying back that amount plus interest, so it is best to seek out the lowest interest rate possible. If you commit to a loan with 14% interest and then realize you could have had a loan elsewhere with 7% interest, you will be paying much more than you need to. Research credit unions in your area and who is providing the lowest interest rates.

Because of interest, the more you can pay with a down payment, the better off you will be. Since a down payment does not have interest and is a flat payment toward the total amount of the vehicle, there is no upcharge to the amount you put down. It may hurt more on the front end, but your future self may thank you for the extra amount you put down in favor of sparing more interest payments.

When deciding upon a vehicle, determine how much you can reasonably put down and ask yourself, "Can I put down a little bit more to avoid long-term interest charges?" Find the loaning party with the lowest interest rate; once you've determined the monthly payment, put that in your monthly budget, knowing there is no way around paying that consistent amount each month. Paying your monthly loan payment on time each month will work wonders for your credit score!

Insurance Costs

When you're following the excitement of purchasing a vehicle, it can be easy to forget about insurance. Your vehicle must be insured, and you'll want to make sure you find an insurer who keeps costs within reason. However, the make, model, and model year can all affect your insurance premiums. Because of this, you will want to do your research before you pull the trigger on any given vehicle rather than after the fact.

If you don't currently have an auto insurance agent, it is advisable to seek one out. Perhaps ask other people you know who they work with and how their experience has been. When it comes to insurance, the referral of trusted individuals is likely going to be more powerful than an internet search. You can, of course, speak with your dealer about insurance suggestions as well; sometimes, dealerships may have partnerships with insurance companies, which can make your search easier. Once you have found an insurance solution, inform them about the specifics of the vehicle you are interested in; they will likely ask you some questions to determine your insurance costs.

Older cars often have higher insurance costs, especially if they have fewer safety features or older parts that may be hard to source. That being said, newer vehicles can also have high insurance rates if they have highly specific features. Because of this variability, we suggest that you speak with a dealer representative or insurance agent directly for guidance in this area.

Once you have a feeling for your insurance rate, add that monthly cost to your monthly budget as well. Failing to pay for insurance means your vehicle will no longer be covered, so it is highly important that you make this a non-negotiable expense within your budget.

Routine Maintenance

Maintenance and repairs are closely related. If you maintain your vehicle, you hopefully will not need repairs. Oil changes are likely to be the most frequent maintenance you seek out—and while the exact cost and frequency of an oil change will be dependent upon your area, your model, the type of activity it endures, and the type of oil it requires, it is advisable to seek out an oil change every 3,000 to 6,000 miles; however, some modern vehicles have a range that is closer to every 5,000 to 7,500 miles.

For the average driver, an oil change is likely needed about every three months or so. This, of course, is not a blanket statement for all drivers but is a general statement; mileage is the more important factor than time in this regard. You'll want to identify the price of an oil change for you, your average monthly mileage, and from there calculate how often you need an oil change and how much it will cost each time.

While less consistent than an oil change, you'll also want to have a general sense of other types of maintenance, like replacing headlights, tail lights, brake lights, air filters, etcetera. Again, all of these costs will be determined by factors specific to your vehicle and your driving habits, but it's important to consider a wide range of possibilities.

It's easy to budget on a best-case-scenario assumption, but sometimes, when budgeting for a vehicle, it is helpful to budget on a worst-case-scenario assumption; maybe try assuming that you need to service one other item on your vehicle every time you go in for an oil change. Find the average cost and add that to the cost of your oil change. If you add that cost to your monthly budget, you may be pleasantly surprised when you don't have to spend that money on any given month and have some leftovers!

Repairs When Needed

As we said above, the goal is that if you maintain your vehicle, you won't need repairs. But sometimes, things go wrong; damage occurs, fender benders happen, or the years bring wear and tear. While these things are not always predictable, it is, of course, good to cautiously plan ahead.

Depending on the vehicle you are purchasing, you can sometimes have a sense of how soon it may need repairs and how much it will cost. If you are purchasing a newer vehicle, the hope is that repairs won't be needed in the foreseeable future. But, if the vehicle in question is older, it's important to inquire about key parts and if any repairs can be anticipated in the near future. If the vehicle has a known issue, it doesn't necessarily mean that you shouldn't purchase the vehicle, but it does mean that you should incorporate that into your budget plan.

It's also important to determine what kind of repairs are necessary. If there is some cosmetic damage to the exterior, you don't necessarily need to rush to get that repaired right away if it isn't in the budget. However, if there is a serious engine or brake issue, you will want to make sure that it is dealt with immediately, as it could cause serious damage or safety hazards.

When purchasing a used vehicle, it may be worthwhile to run a vehicle report by a trusted car mechanic to get a second opinion on what costs may lie in your future, how much those costs will be, and how soon they will be necessary.

Be Proactive About Vehicle Ownership

It can be intimidating to think of all the potential costs when purchasing a vehicle. However, understanding different types of costs will help you get a more realistic picture of what you can expect, and communicating with helpful and trustworthy people will go a long way. Auto loan costs and insurance costs are consistent, so you can identify exactly what your monthly costs will be for those items; add those to your monthly budget and make sure to pay them consistently to avoid any trouble!

Maintenance costs are somewhat predictable, like oil changes. However, it may vary from time to time as your vehicle gets more activity; incorporate the consistent cost into your monthly budget and allow for some wiggle room. Repair costs are not always predictable, but understanding the state of your vehicle at purchase will help to plan; working with a trusted dealer and a good mechanic will help you stay on top of these things. By properly planning ahead, you will be able to have some money set aside for when the unexpected does occur.

We hope that these budgeting practices will help you plan effectively to optimize your ownership experience and finances. By sticking to a consistent monthly automotive budget, you may discover some financial insights that will help you make the most of your monthly costs.