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Everything You Need To Know About Your Car Finances



2021 Toyota Supra 2.0

How much to spend on a car is an essential question to maintain personal finances. After housing, the vehicle is usually the largest outlay that a person makes. However, the car has a passion component that often makes people spend more money than is advisable. Once you have a clear idea of how much you can spend on buying a car, you should limit your search to that number. In the car buying advice section, you can find many articles that can guide you on which car to buy. It is vital to resist the temptation to buy a car that you cannot afford, no matter how excited you are. It is a severe mistake that can seriously compromise your financial health … and in the end, you will lose your money and your dream car. Safety is paramount too, so shopping around will help you financially but again, you must be sure that you can fund it, no matter what should occur on the road (including accident and insurance claims). 

What to look for when buying a car

Another crucial aspect when buying a car in 2020 is its powertrain technology. Hybrid and electric cars are still somewhat more expensive than gasoline or diesel cars. Yet, they are also the only ones for which the national government and the autonomies provide financial aid. Also, if you are going to use your vehicle in large cities, you must consider the restrictions that already exist or those foreseen in the medium term and for which you will need your car to have the ECO label. However, the big problem with electric vehicles, in addition to a higher price, continues to be their autonomy. So if you are going to make long intercity trips regularly, the best option is still a hybrid or gasoline car. However, you can make some calculations to ensure that you are buying something within your budget. 

The key tool: the 4/20/10 rule

It is always said that you shouldn’t spend more than your income on a car in a year. However, there is something known as the 20/4/10 rule. It is not about model measurements or a complicated mathematical formula. It is merely the simplest way to understand how much the car should cost to avoid drowning at the end of the month. These are some fundamental steps that everyone should take into account:

20% of the vehicle

If you don’t have enough money saved to pay the 20% down payment, it means that you can’t afford to buy that car. Due to the car’s depreciation, the money from the entry can be lost when you take the vehicle out of the dealer’s door (usually 19% the first year). Don’t try to make an effort thinking, “things will be better in the future.” The car’s total price, minus the down payment, will be the amount that you will finance through a loan. The more you pay upfront, the lower the loan’s monthly installments for the car’s purchase. It is also not advisable to liquidate all the savings since an unforeseen event can always arise. Try to pay as much down payment as possible without leaving your savings “shaking” since the initial amount you payout will help you reduce the amount of interest to pay.

You may find specific promotions from manufacturers that offer interest-free financing, but it is not the usual thing. You can also find vehicle financing offers without entry, a formula that allows you to have the car immediately, but then the monthly payments will be much higher. Do not bite: it will always be better to postpone the purchase until you have saved the entrance. Above all, remember: if you do not have 20% of the car’s value, it is a sign that the vehicle is too expensive for you.

Man driving a car

New or second hand

New or second-hand car? The reality is that there is no 100% correct answer, and this decision is greatly influenced by the value you give to the brand new car and the previous experiences in your environment.  The numbers tell us that used vehicles tend to be cheaper, and there is no data to prove that they are more likely to go wrong. However, this is not the most important thing to make a decision. From a strictly financial point of view, what you should assess is the depreciation rate of the car’s price. As soon as you leave the dealership, your vehicle will lose 15% of its value. If you wanted to sell it the day after you bought it, you should be willing to assume that you will do it for much less than what you bought it for. From there, the speed with which it loses value slows down a bit more. In the first year of life, the decrease will be more or less than 16% in total, and after three years it will cost half. These are approximate calculations from the vehicle’s age to the mileage through consumption, its state at that time, or issues such as the new models that have appeared or the vehicle’s sales volume at the time. 

Insurance is key

Insurance is vital if you have a car, or any vehicle, in your possession. Many people consider it an expense since they think paying the insurance policy represents an “income” that is not reflected in the family economy. And although the truth is much better never to have to use your auto insurance, believe me, that when it is required to use, one appreciates the fact of having made this valuable investment. Just in case you are involved in some motor accident, you need to ensure that you have the correct insurances in place. If you hit a car, you do not have to pay a deductible for it. Simply because you have already paid the full cost of your insurance policy, you will have the support of a reliable company that will be in charge of sending your vehicle to the best workshops to repair it. Therefore they have more excellent bargaining power vis- à- vis the mechanical workshop in terms of deadlines. Car accidents are unfortunately quite frequent, and if you have any problem with your car, you may want to look at having some extra cash aside just in case you need legal advice. If you have been in contact with a drunk driver who has hit you, you may be entitled to compensation, and in this instance, you may need a dui lawyer. You will be asked what type policy you have and any information you may have about the accident itself. This may include witnesses, and other info. 

The type of coverage

Depending on the type of coverage you have, it gives you the security to recover your investment because if you do not have one, you risk spending much more in the long run. There are currently many types of coverage, insurance, and terms on the market. In addition to the fact that the services that include insurance are also very varied, some policies cover your car’s repair or payment and have medical, legal, road assistance, and towing services. There is also total coverage or only damage to third parties, insurance that you can hire even per day, especially if you are going on a trip. 

BMW M3 - front view

If there is any type of theft, your insurance will offer you advice from its lawyers who will guide you on the procedures you have to carry out and will even protect you. Suppose there is a person injured in the event of an accident. In that case, a group of lawyers will also take care of everything, but the driver still holds responsibility for what happens to the occupants of their own or someone else’s car. Think about it logically, it is better to make small payments on insurance than to face the consequences of a loss alone or a situation that is out of your hands and that could ultimately ruin your finances.

  • Replace your stolen or crashed car – Car insurance gives us coverage against accidental damage and protects us against the total or partial loss of our vehicle in case of theft or accident.
  • Covers damage to third parties and medical expenses – The insurance assumes the responsibility that we may incur either for damages caused to third parties, in the event of a collision or traffic accident. We can also use this coverage to pay for your medical expenses after an accident.
  • Pay for property damage – If you have an accident and your car needs to be repaired, the policy covers a percentage of the damage.
  • Legal protection – Includes a legal orientation service. In case of a lawsuit, it guarantees you the service of professional lawyers who will process your freedom and that of the car, covering the corresponding fines and bonds.
  • Roadside assistance – If you have an unforeseen event on the road, the insurer will help you with a tow truck, gasoline, tire change, among others.
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