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July 16, 2010
Car Ownership
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A car is usually the first major purchase adults make. If car ownership is on your mind, you should start thinking about payment options. You can pay cash or lease or buy a car with a car loan.
Most people can’t afford to pay cash for a car, even if it’s generally the least expensive option.
- About 12% of people pay cash for their car.
- About 15%–20% of new cars are leased.
- About 70% of cars are purchased with a car loan.
If you choose to lease or buy a car, remember to keep your payment to less than 15% of your monthly income. Lenders will let you go higher, but then your payment may become financially unmanageable.
Before you buy a car, create a budget to see what you are comfortable paying monthly. Use our budget calculator and budget worksheet (pdf, 0.34 MB) to get started.
Buying a Car
Buying a car has several pluses: you’ll own the car outright, and a quality car can last a good 10 years (sometimes even longer). But buying a car has negatives, too—many new cars lose more than 50% of their value in the first 3 years.
Here are some additional things to consider:
- Purchasing a used car is far cheaper than purchasing a new car.
- Loan pre-approval will help you determine how much you can afford before you start car shopping.
- Extended warranties can be expensive. Determine whether or not you really need one.
Keeping Loan Terms in Mind
If you decide to purchase a car using a car loan, keep your loan terms in mind. Compare the price difference of a $20,000 car purchased at a 7% interest rate but repaid over different periods of time:
| Interest Rate | Repayment Term | Monthly Payment | Total Repaid |
|---|---|---|---|
| 7% | 84 | $347 | $29,159 |
| 7% | 60 | $396 | $23,761 |
By paying just $49 per month more, you will save $5,398 over the life of the loan.
Leasing a Car
The advantages of leasing a car are:
- You’ll likely have lower monthly payments than if you buy.
- You’ll get to drive a new car more often.
The disadvantages of leasing a car are:
- You rent it, but you’re still responsible for all maintenance fees.
- You may incur penalty fees at the end of the lease (excessive mileage is one such fee).
- It is very expensive to get out of a lease early.
A good financial advisor will be able to help you decide if leasing a car is the right option for you.
Research Before You Buy
Always research cars before you buy one. Edmunds, Kelly Blue Book, and U.S. News and World Report are all great resources.
