Thinking about buying your first car, but not sure what your budget is, or should be? Today we’re going to break down the numbers and figure out how much you should be spending.

Let’s start by talking about loans.

If you are considering taking out a loan for a vehicle, keep in mind there are several draw-backs to this. The most obvious one is the interest you will have you pay when paying off your loan. As of the writing of this article, interest rates float around 4% for 72 months, which depending on the loan amount, can be hundreds or thousands extra you are paying for your vehicle. To add to this, while you have a “lien” on your vehicle (meaning you owe money on it) will require you to have full insurance coverage. This may not be make a difference for some individuals opting for full coverage regardless, but if you’re a student paying your own insurance, you might want the option to only pay liability coverage.

To put the cost difference in perspective, my brother and I are of similar age and driving experience, and his driving record is cleaner than mine. However, I pay just shy of $60 a month for liability coverage, while he is paying well over double that for full coverage.

So, what are the advantages to taking out a loan to buy a car?

Probably the largest advantage, especially for a younger person, is building credit by taking out a loan. As long as you make all your payments on time, taking out and paying off a loan for a vehicle can be a huge boon to your credit score. This can help you get better rates on loans in the future, and give you an advantage if you eventually plan on buying a home. Depending how young you are, this may also be the first large bill you’ll have to pay each month, and can be a good lesson in managing your finances.

I have $2000 saved up, should I be looking at $2000 cars?

The short answer is ‘no’. The longer answer is you should have a nice cushion left over after buying a car, especially a used one. Once you purchase a vehicle you will have to keep in mind that you will need to pay taxes and registration after the purchase. I would say expect to pay 15% of your vehicle’s price to Uncle Sam after the purchase. This will vary depending on where you live.

So, for example, if you purchased a $2000 vehicle, expect to pay $300 more on taxes and registration.

On top of that, you will want some funds leftover for any fixes the vehicle may need. The sad reality is people won’t tell the whole truth about their vehicle when selling it, and may know of an upcoming pricey fix that they neglect to tell you about. Obviously do your due diligence to make sure there are no major issues with the car you buy, but have some money left over to fix it if need be. You don’t want your car to break down and only have $20 in your bank account to repair it!

There is also a “happy medium” route you can take.

Say you want to buy a $2000 car, but only have $2000 dollars. You can always pay $1000 cash and take a loan for the other half of the purchase. That way you have $1000 left over for taxes, registration, and just in case something breaks.

My advice would be to pay for as much of the vehicle with cash as you can, to save money in the long-run.

How old should the car I buy be?

You might not be sure where to start when shopping for a car, particular what model year and how many miles you should stay under. This mostly comes down to your budget, just keep in mind the newer the car you buy the faster it depreciates. Many new vehicles will lose 50% of their value in their first 3 years. With that in mind, there is nothing wrong with buying a reliable older vehicle. If you’re spending less than $3,000 on a car, chances are you might lose a few hundred dollars a year to depreciation, as opposed to thousands you would lose on a new vehicle.

Should I buy a younger car, or one with fewer miles?

This comes down to personal discretion, but my rule of thumb is 1 year of the car’s life is equal to about 12,000 miles. So if the choice is between a 2005 car with 150,000 miles on it, or a 2004 car with 135,000, I would be more inclined to buy the 2004 car based on that information alone.

What does a salvage title on this car mean, and why is it so cheap?

A salvage title means the car has been “totaled”, meaning it either needs or has had repairs done to it that exceeded the value of the vehicle. For example, if a $5,000 car is wrecked and it takes $6,000 to get it running again, that car has been totaled. These cars may seem like good deals on the surface, but they become much less predictable as far as what maintenance will need done, as something major has happened to the car in the past.

What about prior salvage or rebuilt titles?

This simply means that the car has been salvaged, repaired, and inspected by the state certifying that the damage has been repaired. Speaking from personal experience, I owned a prior-salvage vehicle for a short time. It was dirt cheap and always got me from A to B. That being said, there was always something wrong with it. Nothing major, but always one thing after another. Keep in mind this was a 2011 Honda Civic with few miles on it, by many people’s standards, a very reliable car. With these prior-salvage cars, the up front cost will be less, but keep in mind maintenance over time may not be worth the initial money saved.

Should I buy from a dealership or a private party?

As someone who has purchased vehicles from both private parties and dealerships, as with almost everything, there are advantages and disadvantages. With a dealership you are less likely to have a major issue with the vehicle shortly after purchasing it, and depending on the dealerships warranties and policies, you may be able to have them cover a repair if you run into one.

However, you will save a lot of money buying from a private party, and for a small fee can get it checked out by your local mechanic before purchasing it, for peace of mind. You can also always have someone who knows about cars come with you to inspect the car, and maybe hook up an OBD II scanner to see if there have been any past check engine lights/fault codes.

 

What is the ideal amount a student should pay for a car?

This truly comes down to you and your financial situation. In my opinion, the ideal scenario is buying a car with cash for less than 75% of what you have budgeted. I also have a slight preference towards buying vehicles from a private party, but that’s just my personal experience (I worked at a dealership over summer in college, it was eye-opening to say the least!) In most cases there is no need to spend your entire car budget on what you purchase. This leaves you with plenty a wiggle room for repairs, taxes, registration, and insurance. Buying a less expensive vehicle also leaves you less susceptible to depreciation. I bought my first car for $3,000; 1 year and 20,000 miles later for $300 less than I bought it for, 10% isn’t bad! These are all just rules of thumb, as always do your homework and research the specific vehicle you are interested in before purchasing. Be sure to shop around, you never know when you’ll find a good deal.

With that said, buying a car is fun. Sure, there’s a lot of work and stress that may go into it, but it can be an enjoyable experience as well. I hope this information helped you in planning to buy a vehicle, and wish you the best of luck!