Five Things to Consider When Setting a Budget for a New Car Purchase [Checklist]

Let’s discuss what you should consider when establishing a budget for your new vehicle.

Budgeting basics

Too often people focus on only the price or payment of the vehicle. This can cause them to purchase a vehicle they may not really want because it fits the payment or price point they desire. That sounds like the reasonable and responsible thing to do. BUT…it’s possible that the vehicle you really want may have a higher price and higher payment, but in turn have a lower total cost of ownership. So what’s important is understanding what makes up the total cost of ownership. This is what is important when you are establishing a budget. Here are the things you need to consider in the total cost of ownership.

  • Financing Terms

Financing terms are a huge part of the total deal and dramatically affect the total cost of ownership. An increase of 2% on a loan of 20,000 dollars costs you over $1200 more on a 72 month loan. That equates to around $17 per month on a 72 month loan. The following things can affect the interest rate of your loan.

  • Dealership charges more than the amount you get approved for. That’s right! The interest rate you pay could be more than what you are approved for through the bank. The dealership profits the difference. That is why it is a good idea to shop the financing terms of the vehicle you want. If you don’t know what rates you are approved for, the dealership can charge you whatever they want and you may not even know you paid too much.
  • Miles on the vehicle The more miles a vehicle has the higher the interest rate. Also keep in mind that banks will typically reduce the amount of time that they will allow you to pay off a vehicle. In short, typically the higher the miles, the higher the interest rate and the shorter the loan term, equates to a higher payment.
  • Year of the vehicle New vehicles have lower interest rates than used vehicles typically. Just like miles, the age of the vehicle can also lower the amount of time a bank is willing to finance the vehicle. Again, older vehicles typically have higher interest rates and shorter terms which equates to higher payments.
  • Certified used A certified used vehicle will sometimes come with promotional interest rates. These vehicles have to go through a certification process before being offered for sale and they are newer pre-owned vehicles. The manufacturer finance companies offer promotional interest rates typically lower than what you can get through the bank to give you an incentive to buy them. These vehicles also come with an extended warranty. You may be able to get a certified vehicle that comes with a warranty for the same payment as a vehicle without a warranty that costs less. Your total cost of ownership may be less on a certified vehicle even if it costs a few thousand more than a regular pre-owned vehicle.
  • Term of the loan This is pretty simple. The shorter the loan term the better the interest rate. I have seen people agree to pay $20 dollars less per month only to pay the loan for an extra year. That is terrible. Make sure you know the term of the loan and ask if you can reduce the loan term to get a better rate and how that affects your payment. Never shop for a vehicle solely based on payment. That’s how dealerships maximize profit.
    The financing terms of the vehicle are just as important as the sale price of the vehicle. A good idea is to get a pre-approval from your bank and shop the interest rate at multiple different dealerships. Never let someone tell you the interest rate is fixed and can’t be negotiated. Always negotiate the interest rate.


  • Cost of Insurance 

The cost of insurance should always be considered before you agree to buy any vehicle. Here is why. Many times I have clients say things like, “I like that vehicle but it is $2000 more and I can’t afford it.” What they do not realize is that the vehicle they want costs $30 dollars less per month to insure. What normally will happen is that people look for a vehicle and make a deal  and then call to add insurance. But you should always check insurance rates on the vehicles you are considering before making a deal so that you can get the most bang for your buck. I see this happen all the time with new drivers especially. I have clients who are parents that want a small compact vehicle for their child. However, they would really feel better with their child driving a small SUV because of the safety. SUV typically cost more in price and payment. But the cost of a lower insurance rate can offset the total cost of ownership. Those small compact cars can have the highest cost of insurance while the small SUV has some of the best rates. Just check before you buy!

  • Costs to Service the Vehicle

How much do new tires cost? How much does an oil change cost? Does the vehicle have known issues that go wrong? Does the vehicle come with a warranty? These are all the things you should consider before buying a vehicle. A lot of car owners and buyers don’t know that certain types of vehicles or brands can be more expensive to maintain. You should know a bit about the car brand you are buying.

  • Gas Mileage

When gas prices skyrocketed years ago everyone considered it a factor when purchasing a vehicle. Gas prices went back down and people think about it less. It is a really easy equation if you want to consider the cost of gas.

Figure out how many miles you will drive in a year and divide that number by the average fuel economy of the vehicle. That gives you how many gallons of gas you will buy in a year. Take that number and multiply by the cost of gas per gallon, then divide that number by 12.

Let me show you how that looks.

Here’s the scenario. You drive 10000 miles a year in a car with 20 mi per gallon and gas costs about $2 dollars per gallon.

10000 miles per year / 20 mi per gallon = 500 gallons of gas per year

500 gallons of gas x $2 dollars per gallon = $1000 in fuel

$1000 in fuel / 12 months= $83.33 per month in fuel

To compare if you got a vehicle that got 30 miles per gallon you would save 27.78 per month. Factor in the cost of fuel to get your total cost of ownership. If doing these calculations and reviewing these scenarios overwhelms you, just message me I’m happy to work the numbers through for you and answer your questions.

  • Resale Value of the Vehicle

The resale value of the vehicle is a huge factor on what vehicle you should buy. Think about if you only planned on owning a vehicle for five years and you were considering two vehicles. Vehicle A you really want but it costs $20,000 and vehicle B costs $15,000 to buy today. In five years, vehicle A could be traded in or sold for $10,000 and vehicle B can be traded in or sold for $3500. Vehicle A actually has a total cost of ownership $1500 less than vehicle B. Estimating the resale value of vehicles is a little tricky but you can make a good estimated guess. You really should consider how long you plan to own a vehicle and what is the estimated value of that vehicle when you will get rid of it.

You see if you only focus on the price of the vehicle or the payment you may end up buying a vehicle that you really didn’t want when the vehicle you do want actually has a lower cost of ownership. A dealership salesperson is reluctant to tell you this information because it just makes your decision harder to make. Because I am a consumer advocate I want you to have complete knowledge before you buy.

There’s a lot to digest here.

If you have a question about any of it message me. Pick my brain or ask for a Free One-on-One Strategy call if you feel ready to hit the pavement and make a deal.

Coming up with the budget should be a high priority item in your car search and buying process. Another step in the process is considering your trade in. See What’s the value of my trade in and should I sell it on my own? to help decide what to do with your trade in next.

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