The most recent retail sales report showed consumer spending on the rise, driven in large part by auto sales (no pun intended). Thinking of buying a car? With a plan you can make sure you stay on budget and make the best deal possible. Here are a few things to keep in mind.

Do You Need a New Car?

Do you really need to buy a new car? The average car owner keeps their car for 11 years these days. That’s up from about 8 years in 1995, but still less than what you could do. Today’s models can reasonably last 200,000 miles or more according to Consumer Reports. If you drive an average number of miles, that translates into a life of about 15 years. If your car doesn’t have serious structural problems, and it remains reliable with normal maintenance, you can reasonably keep it a while longer. Keeping it longer stretches the value of your original purchase, and if you haven’t already saved up to buy your new car, it gives you some time to do so.

New or Used?

Of course everyone knows that cars lose value quickly. The chart below shows just how quickly.

Source: Edmunds.com

The rapid loss of value is one reason many cite the wisdom of buying used instead of new. But if you plan to keep your car for a long time, buying new can make just as much sense. However many miles you plan to drive your car, if you buy a used car, consider how much the prior owner has used of your mileage maximum. Even the depreciated price might not be worth it, if the remaining life of the car is disproportionately smaller.

For example, take the car above. A two year old version looks like a good value given that it is one third cheaper. But if the previous owner put more than 30,000 miles on it, and you do plan to keep it to the 200,000 mile mark, the new car is a better value. The purchase price per mile remaining is lower for the new car.

Cash or Loan?

Ideally you would pay for your car with cash. You avoid financing charges, and you are in a better bargaining position for whatever car you choose. How can you get to the point where you can pay cash? Once you’ve paid off your current car loan, pay yourself the payments instead of buying a new car or using the extra cash for other things. Even at today’s low interest rates, you can save for your new car in less time than the typical loan term. If you keep that car for 15 years, you will still enjoy more than half of your ownership payment free.

Financing?

If you do need to finance your car, be aware of the strategies dealers use to get you to spend more. Pay attention to the price of the car you are buying and not the payment the dealer is offering you. Dealers make it easy to spend more money than you planned by focusing on the payments. Additional costs spread out over your loan term sound like just a few dollars more per month, but may be thousands more over the life of your loan.

By focusing on the payment, you may be tempted to add options that weren’t in your original budget, opt for a more expensive model, or extend your payments longer than planned. If you added $2,000 in options to the car above, your payment would only increase by $44 per month if you were financing with a 48 month loan, but it will cost you $2,244 in total with the additional interest charges.

Or maybe that car is beyond what you can pay monthly. No problem, they’ll extend your loan to 72 months, and your monthly payments will be $160 less. But, over the life of the loan you will pay $2,624 in interest charges, Over $1,000 more than what you would pay on a 48 month loan¹.

Aside from the additional interest charges, long term loans leave you with less equity in your car. If you decide not to keep it long term, for whatever reason, the amount you can sell the car less what you still owe on it can leave you in the hole depending on how much you put down to buy the car in the first place. Don’t take zero down payment offers, and don’t finance for longer than 60 months.

Zero percent financing may be a good deal, but it may not. The car manufacturer is sacrificing the money they would earn on interest on the loan, so they may be less open to negotiating the purchase price. A cash buyer may be able to get a better deal on the car. Even if you can’t pay cash for the car, you will be in a better bargaining position if you have alternatives to dealer financing. Check out loan rates with your own bank or credit union as well as on-line loan options.

Buying a car is a challenge, and you will only buy a few in your life time.You can avoid over paying by starting with a plan. Do your research ahead of time. Know exactly what car and features you want as well as what you can expect to pay for them. Edmunds.com and Consumer Reports are good sources for the information you need. If you can’t buy with cash, make as large of a down payment as you can and come armed with your own financing. Once you’ve bought your new baby, take care of it and you can keep it for a long time.

1)Loan rates from BankRate.com: 48 months, 2.99%, 60 months 3.24%, 72 months 3.49%. Down payment of 20% assumed.

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