Is It Time to Buy a Car?

Do You Need to Buy a Car?

• Necessity: If you don’t require a car for daily transportation, borrowing or renting a car only when you need one may be a more practical choice.
• Safety: If you already have a car, but you sense—or your mechanic tells you—that the car is no longer safe to drive, it’s time to replace your car with one that runs reliably and includes up-to-date safety features.
• Savings: Sometimes it’s possible to save money by buying a car. For instance, if you spend a considerable amount of money on fuel, insurance, or repairs due to the condition of your current car, it may be more cost-effective to buy a new or newer pre-owned car.
• Budget: Car ownership entails costs beyond the mere purchase price of the car (see below). If you’re not sure you can afford all of the costs of car ownership, it’s best to put off buying a car until your budget can cover all of the expenses involved.

Can You Afford a Car?

Ownership Costs

• Purchase price: If you buy your car outright, you’ll likely need to spend at least $10,000 for a new car, or $3,000 for a pre-owned car.
• Loan payments: If you’re not paying the purchase price in full, you have to secure a loan and pay it off in monthly installments. Loan payments vary depending on your down payment—the sum of money you pay up front toward the purchase price. A typical monthly payment is at least a few hundred dollars.
• Insurance: Most states require you to have insurance that covers your potential liability in case you cause damage or personal injury. Costs vary depending on your car’s value, the types and levels of insurance you carry, your location, and your driving record.
• Licensing and registration fees: Before you can drive your car legally, you need to pay various fees to your state in exchange for your license plates and registration. Most states charge these fees annually based on the current market value of your car. Costs vary widely by state; expect to spend at least $50–100 for initial licensing and registration fees. You’ll pay slightly less each year as your car depreciates in value.
• Taxes: Most states charge sales tax and various other taxes when you purchase a car. These typically total at least 5% of the car’s purchase price.
• Depreciation: When you buy a new or pre-owned car, you’re spending thousands of dollars on an “investment” that will undoubtedly lose value. Depreciation, the loss of value that your car suffers over time, determines the resale value, or current market value, of your car. The value of a car depreciates most rapidly in its first year of use.

Operating Costs

• Fuel: Even the most fuel-efficient cars require that the average driver spend $50–100 per month on gas (assuming that gas is about $2 per gallon). If you plan to drive more than the average annual amount of 12,000 miles, or if your car is a gas guzzler (gets less than 20 miles per gallon), expect to spend even more on gas.
• Maintenance: Standard maintenance costs include replacing oil, oil filters, and coolant; rotating and changing tires; washing; and regular tuneups. Expect to spend $25–100 every 3,000–5,000 miles for small maintenance items and $400–1,500 every other year for larger maintenance costs, such as new tires.
• Repairs: All cars require occasional repairs beyond standard maintenance. Repairs can cost anywhere from $50–100 for minor work to several hundred or even thousands of dollars to replace major components, such as brakes or transmission.
• Roadside service: If your car breaks down on the road, you need to pay for a tow truck ($75–125). Many drivers buy an AAA (American Automobile Association) membership (www.aaa.com), which includes roadside service, to cover this cost. AAA rates vary based on your location, ranging from about $40–100 per year.
• Parking and storage: Unless you own or rent a home with a driveway or garage or live in a neighborhood with free parking space, you need to pay to park or store your car. Expect to pay at least $50–100 for monthly parking privileges, and considerably more if you live in a major city.

Should You Replace Your Current Car?

• Cost: The ownership costs associated with buying a new or pre-owned car may be high, but keep in mind that most cars don’t need major repairs until after their fifth year of operation. If you’re driving a car that’s more than five years old, you may save money in the long run by buying a newer car now. Many, though not all, newer cars are more fuel-efficient than older cars, which will save you money on gas.
• Safety: New cars have the newest and most advanced safety features. For instance, though all cars manufactured over the past 10 years include front airbags, only newer-model cars have side-curtain airbags, which provide extra protection during side-impact collisions. Advanced safety features available only on new cars include radar-controlled collision warning systems and tire-pressure monitoring.
• Reliability: New cars are more reliable and require repairs fewer than older cars. They’re also backed by warranties, which typically cover major repairs, if any, made during the first three years (at least) of the car’s operation. Some new-car warranties offer protection against major repairs for up to 10 years.

Should You Trade in Your Current Car?

• Lower than the price you might be able to get by selling the car to a private party
• Higher than the price you’d get by selling the car to a dealer without trading it in for another vehicle