Chances are you have probably seen at least one a car commercial today before reading this. So I probably do not need to tell you that many companies have been offering 0% APR on new vehicle purchases. You may be wondering if now is the perfect time for that new ride given these promotions?
In today’s post I hope to provide guidance around this question and car buying in general.
1. Were you already in the market for a new car?
If so, now that you can finance it at likely zero cost, it may be a great time. However, if you were still several years away from a purchase or were previously considering a used car, the benefit of 0% interest will likely be largely offset. According to AAA in 2019 the annual cost of vehicle ownership for a mid-size SUV (taxes, fees, insurance, depreciation and finance charges) is $6,845. The largest line item is depreciation (loss of re-sale value due to time) at $3,794/year. Depreciation cost will reset and be higher when buying a new vehicle.
While paying 0% APR is great, avoid the temptation of purchasing a new car before you otherwise would have.
2. How long do you normally own a car before purchasing a new one?
Before buying your next car, it is good practice to review how long you have owned your current one. If you do buy a new one, how long do you plan to have this one? According to an IHS market study referenced by Forbes, the average American owns a new car for of almost 6.5 years. Looking to the past will allow you to better plan for the future as well as better account for your true cost of vehicle ownership.
Guidance – for every year you can extend car ownership the greater financial benefit you will experience. This is incredibly relevant right now as many people are driving less than before – leading to less of a need for a new car. By delaying your purchases your savings can be allocated toward other financial goals (building an emergency fund, funding higher education, retirement, etc.)
3. How many years do you planning on financing it?
It is easy to think in terms of monthly payments, but the average length of loans has been steadily increasing. While this may make your monthly payment more manageable, it may lead to buying a more expensive car and increasing your overall cost.
Guidance – focus on the total cost and not just the monthly payment. Make it a goal to keep your term to no longer than 5 years (60 months).
GuidePoint Financial Planning - Northern Va Financial Planning
Ryan Phillips, CFP® is the founder of GuidePoint Financial Planning. He is passionate about helping busy families plan, save, and invest for their financial future. Contact him today if you are interested in learning more about the benefits of working with a fee-only (no-commission) financial planner.