Ever known this feeling? You think you can afford that car payment (the sales person said you could!), but some months down the road it begins to hurt. And there are 52 more payments to go! You end up eating lots of pinto beans.
Don’t let that happen to you again. If you’re thinking about a new or newer vehicle, do it like this, and you’ll be in control of your car-buying — perhaps for the first time.
Think budget before you think new or used. Here’s a radical approach to budgeting: Find out how much cash your budget will provide for a vehicle. Let that amount of cash determine what you buy.
First, determine how much cash your payment will buy. What payment can you really afford? Can you afford to pay more? Would you like to pay less? Think about your current payment, and adjust it up or down to fit the payment you actually can afford. And then have a lender at North Shore Federal Credit Union tell you how much cash that payment will buy. That’s right, payments buy you a pile of cash. For instance, if you say, "I can afford $300 per month and don’t want to pay more than 48 months," what you’re really saying is "I can afford to buy $12,000 in cash." That’s based on a 9% loan rate.
Second, determine if your trade-in is worth any cash. Ask your credit union lender to tell you your car’s average wholesale value, a rough guide to its real value. And then deduct what you owe on it, if anything, from that wholesale value. Your credit union can get you your payoff — the amount it will cost to retire a current loan. Let’s say your old vehicle is worth about $4,000 wholesale; let’s assume you owe $1,500 on it. That means your old car is going to contribute $2,500 to your cash pile.
What if you owe more than your car is worth? Dealerships call this "being in the bucket." Stop by or call your credit union lender to discuss your options.
Third, look at other cash sources. Are you planning on making a down payment from your savings? Smart. Let’s assume you’re putting down $2,000 from savings.
Fourth, add up the cash from all these assets: Your car budget contains $12,000 from your payment, $2,500 from your trade and $2,000 from savings. You have $16,500 Available Cash to buy a vehicle and remain on budget. Don’t spend more than that, and if you’re careful, your payment won’t be more than your budgeted $300 per month. No more pinto beans!
Fifth, let your Available Cash determine whether you buy new or used. If you’re shopping for a new car, look for cars with Manufacturer’s Suggested Retail Prices below your Available Cash. If you’re shopping for a used car, try to buy a car with a "Loan Value" close to your cash figure. Your credit union can give you the names of used car models in that range.
Take your time, save your money. New or used, go slow, be patient, and don’t be pushed. It’s your money. Make a budget and stick to it.