For most of us, a car is the second biggest purchase we’ll make. In fact, for those of us with less than $1 million in net worth, our vehicle is often a significant percentage of our assets. And that stands to reason, because owning a car isn’t cheap.
In fact, the average price of a new car in September 2018 was $35,742.
Actually buying a car isn’t the only cost that comes with purchasing the vehicle. There’s also depreciation, insurance, maintenance, and gas to consider—it can add up. Depreciation is one of the largest costs of owning a new car. Therefore, the longer you have a car, the more your investment pays off. Not-so-fun fact: A new car typically loses 20% of its value in the first year of ownership.
Assessing a car’s value, and how that value changes over time, is the first step when considering financing a car. Once you know what car you want and how much you should pay, it’s time to consider your financing options and how to get a car loan.
How to Assess the Value of a Car
What do you need in a new car? What kind of gas mileage, capacity, and features? And, most importantly, what can you afford to spend? Before you head to a dealership, you should decide what you’re looking for, and extensively research the car you want.
Once you have an idea of the car you’re interested in buying, there are a number of services that can offer a baseline estimate for the car’s worth. Edmunds’ offers a True Market Value (TMV®) guide; Kelley Blue Book® provides suggested price ranges based on things like year, model, condition, and mileage (particularly useful for used cars); the the National Automobile Dealers Association’s guide focuses on dealer’s sticker prices; and Consumer Reports provides detailed reviews and reports about specific cars for you to compare.
None of these resources will necessarily tell you the exact price you’ll get, but they can give you some necessary context. You may also want to look at listed prices for similar cars in your area. You can even call around to other dealerships and/or sellers ahead of time for price quotes, so you’re better-equipped by the time you walk onto the car lot.
How the Value of Your Car Changes Over Time
While a car is a big asset, it’s also an asset whose value changes over time. Generally, when measuring the value of a car, the cost of depreciation is spread over a five-year period. A new car can lose, on average, 60% of its value in the first five years. It depreciates about 15% to 25% each year.
You also have to consider maintenance costs over time. Consumer Reports surveyed customers to create detailed accounts of different cars’ maintenance costs over time, so you can factor those averages into your calculations.
Car Financing Options
The biggest cost of a car is often the car loan itself. Once you make all the monthly payments (plus interest), you’ll eventually own the car outright. But until then, the car loan is an ongoing cost that has to be factored into your budget. There are a few car purchase finance options: car loans (either direct from a traditional bank or through the dealership) or personal loans from banks, credit unions, or online lenders.
Car loans can be offered directly from the dealer, a bank, or online lenders. Alternately, you can take out a personal loan to finance your car.
If you get a loan directly from the dealer, they generally collect your information and then take that information to prospective lenders to find you a financing offer. Car dealerships are typically designed to help get you a car loan quickly, sometimes even if you don’t have great credit. You can sometimes even sign a car loan and drive off in your new car the same day.
Banks, on the other hand, often offer better interest rates and more favorable terms when applying with them directly, but the application process can be more involved and definitely take longer. The average five-year (60-month) car loan had a 4.79% interest rate in September 2018 , and the average loan amount was $31,099.
If you got those loan terms, hypothetically, you would pay a total of approximately $3,934 of interest on your new car (and that’s not even considering a down payment, which would almost certainly factor in).
Another option for financing a car is not to get an auto loan at all, but rather to take out a personal loan. A personal loan can be taken out to pay for any number of personal expenses—home repairs, debt consolidation, or a new car. On the flip side, a car loan can only be used to pay for a car.
Car loans are tied directly to the car, which means that the car is the asset that secures the loan (also known as “collateral”). Until it’s paid off in full, you don’t own the car, and if you default, the lender could seize your car. However, because a car loan is a secured loan, you may qualify for a lower interest rate than you would with a personal loan.
Personal loans, however, can be a more flexible financing option, because they aren’t tied directly to the car you buy with the loan. A good credit score, along with a solid financial history, can also get you a competitive interest rate on a personal loan.
You also can get pre-qualified for a personal loan before going into the dealership, so you will have an idea of how much buying power you have. (Though keep in mind that pre-qualifications aren’t a done deal, so the loan offer is still subject to change.)
SoFi is a modern finance company that offers low-rate personal loans. Our personal loans come with no origination fees and no prepayment penalties, and we offer fixed interest rates.
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