Sooner or later, the time comes to buy a new car. And whether it’s your first car, or you’re a seasoned “vet,” there are financing strategies that can have a positive long-term impact on your finances. To help you make the most of your car-buying experience, we’re sharing our best Prosperity Economics tips for buying a new car.
How Much Are You Willing to Spend?
One of the first steps to buying a car is deciding how much you’re willing to spend. There are several factors in this decision. You want to think about whether you want to make a down payment, the price range of the car, as well as how much you want to pay monthly.
While you may hear that it’s better to pay cash for your car, we recommend considering other options first. The reason is that once you pay cash for your car, that money is “gone.” You can no longer save it in an interest-bearing account, nor can you invest it. It’s called opportunity cost. Additionally, if that money is your emergency/opportunity fund, then leaving it alone is one of the best things you can do. You want to have that money available for when times are tough—using it to buy your car can leave you vulnerable, and we don’t want that.
When you finance your car, you have the opportunity to do more with that lump sum of cash while making a payment that’s going to feel like less and less as time goes on, thanks to inflation. You may have been told that debt is bad, however, the right kind of debt—like mortgages and car loans—can keep optimizing what you’ve got.
Narrow Your Search—Know What You Want
Now that you have an idea of what you want to spend on a car, it’s time to narrow your search. Is there a new car that fits into your ideal price range? Or are you looking for a used car in good condition?
If you know what you want, it makes the search much easier. And yes, what you want can include things like heated seats and a sunroof. You won’t know until you search if it’s available in your price range.
It’s also good to think about how you’re going to use the car. Is it a commuter car, or do you like to take road trips? You’ll probably want something with good gas mileage and low miles on it. If you think your family might expand soon, an SUV is probably better than a sedan.
Then, let the search begin. Some of the tried-and-true websites to start your search include Carvana, Carfax, and Kelley Blue Book. If you want a new car, start shopping around online at local dealerships to see what’s available (BEFORE you actually set foot in a dealership). If and when you go to a dealership, you’re more likely to walk away with a satisfying experience if you know exactly what you want, and what you don’t.
New vs. Used: Is it Better to Buy a New or Used Car?
When buying a car, one of the most common hang-ups is: Is it better to buy a new or used car?
Fortunately, we think that the answer to this question is customizable to you. There are pros and cons to each, and the right answer is going to depend on what you’re looking for in your new car purchase. Just know there’s nothing wrong with buying a used car.
Pros and Cons of Buying a New Car
What’s great about buying a new car is that you get the latest technology in a car, which is fun to drive, and often has many built-in conveniences. You’re also buying a car with virtually no miles on it, which means that the wear and tear is low. In other words, you can expect fewer repairs. Many people choose to buy new cars when their old cars become too expensive to maintain, so a low-maintenance car may be exactly what you’re looking for.
When you buy a new car, it’s also going to be under warranty. Warranty usually lasts for 3 years, or until a certain mileage. This can save you money on major repairs for a few years if the warranty covers it.
There are downsides to a new car, though. As soon as you drive your car off the lot, it loses value. And by the time you’re done financing your new car, chances are it’s not going to be worth what you paid for it. If you want to trade it in for something new in five years, you might not get the value you expect.
New cars can also cost you much more in car insurance. Insurance companies typically want you to have full coverage on new cars. New cars can be expensive to repair because they have new parts, and there’s less data available on safety ratings, etc.
Is Buying a New Car Worth It?
Who doesn’t love a new car? And yet, you can still get a lot of the “new” car benefits with a car that’s 1-3 years old. You’ll generally get the benefits of low mileage, brand new features, you’re not paying for the bulk of the depreciation, and you may even have some warranty left. Having a car that’s just a few years old might also improve your insurance prospects.
Ways to Finance a Car
As you’ve probably caught on, the Prosperity Economics way to buy a car is by financing. If you can get a low interest rate on your car loan, then you can do so much more with your emergency/opportunity fund. So what are the ways to finance a car?
If you’re not sure what you can get, try going to your local bank or credit union and get pre-approved for a car loan. They can give you an idea of what they’re willing to finance, as well as an idea of what the interest rate might be for a new car vs. a used car. This can point you in the right direction.
As far as financing terms, the longer you can stretch your financing time frame, the better. This may be counter-intuitive to everything you’ve learned, however, you shouldn’t be afraid of payments. The thing about loans is that you can always pay more if you really want to, yet you can’t pay less. By taking the lowest payment possible, you can save the difference, which can make a tremendous impact on your bottom line.
What About a Life Insurance Loan?
If you have a whole life insurance policy, check in with your company about current loan rates. If you can get a low rate, especially a lower rate than the bank, that’s worth considering. However, contrary to what you might think, we don’t necessarily recommend STARTING with whole life insurance.
The great thing about whole life insurance is that it provides you with options and flexibility. And one of those options is to make financial decisions with the confidence that you have “backup.” For example, let’s just say that you start with bank financing. If life and the economy go smoothly, things are looking good—you’re no worse or better off for that choice. However, if things go south and you’re unable to make car payments, you can use a policy loan to pay the bank. Then you have some additional flexibility in your repayment terms.
On the other hand, if you finance with whole life insurance first and things go south, the bank isn’t going to want to offer you a loan. It’s not a good investment for them. Yet your life insurance company doesn’t ask questions when you want to access your cash value with a loan.
Whole life insurance is a powerful asset because it gives you options. And while one of those options is certainly financing, sometimes life insurance should be last in the order of operations. It’s there to give you certainty.
Tips for Buying a New Car: FAQ
Where Should I Source My Down Payment?
A down payment doesn’t have to be large to make an impact. It can, however, help you get even better financing options. One of the first things to consider is whether you want to trade in your existing vehicle. The dealership may offer you some money, though it’s important to go into that conversation prepared. Use Kelley Blue Book and other sites to know what your car is worth. If the dealership doesn’t make a reasonable offer, consider selling the car yourself. And if your car is so old it’s not worth much, you may still be able to get some money for parts if you take it to the junkyard.
If you have an asset like a 401k and you’re planning on liquidating it or stopping contributions, consider using some of those funds for your down payment. You might have to pay some fees and taxes, yet you’ll have to pay them eventually anyway. This is one of the preferred places to get down payment funds if you have it. Next would be your emergency/opportunity fund, yet it’s even better to leave that alone if you can.
What Are The Ideal Loan Terms?
Think long-term and low payment. The low payment gives you the opportunity to put any excess money to better use in your emergency/opportunity fund, while giving you the most flexibility. Don’t be afraid of a long contract—your need for a vehicle isn’t going anywhere, and it won’t hurt you to have that payment.
Learn More About Prosperity Economics
Want to learn more about Prosperity Economics and how to free your finances? Sign up for our Prosperity Action Pack, and you’ll receive a complimentary e-book: Your Guide to Activating Prosperity. In addition, you’ll get our special one-pager on the 7 Principles of Prosperity, as well as audio assets for both of the aforementioned resources.
To work with us and put those Principles of Prosperity in action with a whole life insurance policy, connect with us or email firstname.lastname@example.org.