When I lived in Washington, D.C., right after college, I was the only one of five roommates who had a car. The townhouse we rented was just three blocks from a Metro station which meant that for most of us, it wasn’t necessary. But when my employer moved to the Virginia suburbs, I had no choice but to get one for the commute.
Now I’m a parent of a teenager who recently got her license. We have three drivers in a two-car family, in a small city with not-so-hot public transportation. So of course we’re wrestling with the question many families and young drivers face: When should I buy my first car?
“We’re seeing that millennials are purchasing cars at a much earlier point in life, which is giving them the opportunity to build credit a little differently than previous generations,” said Rod Griffin, Experian’s director of public education. “This is a critical time for members of this generation as they are learning to use credit as a tool." According to Experian data, just under one in five (18.8%) of those age 19-22 have an auto loan appearing on their credit reports, and nearly two in five (39.3%) of those age 23-27 do.
When we think about getting a car we often think in terms of the car payment, but the total cost of getting a vehicle can be much higher than that. Start with your car loan payment (assuming you don’t get a vehicle from a family member or pay cash for one). But don’t stop there. There are other important costs you’ll need to factor in. Try to work out a monthly figure for these so you can come up with a good estimate of your monthly outlay:
- Insurance
- Down payment
- Parking
- Oil changes
- Taxes/tags or license plate renewal
- Maintenance (including tire rotations and other maintenance expenses, especially if used)
- Fuel
- Tolls
A car with a $350 monthly payment can easily wind up costing double that when all is said and done. Is that affordable based on your budget? (Note Edmunds.com has a free tool, the True Cost to Own calculator, that can help you compare the total cost of owning various vehicles.)
A good rule of thumb is to try to keep total car costs at less than 20% of your income, recommends Tim Russi, president of auto finance for Ally Financial. Ally Walletwise offers a free e-course for would-be auto buyers.
Also this free calculator can help you figure out how much your monthly auto loan payment will be.
Next, compare that cost to the time and money you’ll spend using other transportation. For example, if you live and work in a metropolitan area with good public transportation, you may need a car only occasionally and you’d be much better off using a car sharing service, renting a car or even taking a taxi or Uber when needed. For commuting, there may be carpooling options that are cheaper, albeit a little less convenient at times.
Another factor is your credit scores. Have you established credit already? If you don't have a good credit score you may need to get a co-signer. If you do, you put their credit scores at risk if you can't make your payments at any point during the term of the loan. If possible, you could also wait to improve your credit score and maybe even earn a better interest rate on your car loan. (You can check your credit scores for free every month on Credit.com.)
Now think through what happens if things change and your car is no longer affordable. Will you be upside-down and forced to sell it at a loss? Or worse, would that put you in a bind and cause you to fall behind on payments -- possibly risking damage to your credit with late payments, default or a repossession? (Here's how long negative items can appear on your credit reports.)
In our case, we’ve decided to hold off and share vehicles. For the most part it’s worked fine, though a few times already I’ve caught myself heading out to run an errand then realized I had no way to get there. When it comes time for my daughter to get a car, though, we’ll definitely talk about what it really costs.
How about you? When did you get your first car and how did you pay for it? Share your story in the comments below.
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