Buying a car is the second largest purchase most people make, next to where they live. But along with it, some of the worst money mistakes are made. Not the obvious ones either where someone forgets to negotiate. Those small, insidious ones that at first, don’t seem to matter but by the time they’re added up, cost thousands over the years.
These money mistakes don’t come from being careless. They come from tunnel vision when considering a monthly payment and what’s affordable now.
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Mistake One: Focus On Only The Monthly Payment
This is the worst mistake of all. Walk into any dealership and the first question is “what monthly payment works for you?” That sounds helpful. It’s not.
Why? Because a monthly payment means absolutely nothing in the scope of a good deal or not. If you stretch a loan from 48 months to 72 months, that $100 additional payment goes away. Good! But now you’re paying interest on that additional $1,200 for two additional years. Yay, savings! Nope – that’s at least an extra two thousand dollars out of your pocket.
The same goes for a trade-in. If you have a negative equity trade-in and want to keep your monthly payment lower, just stretch the loan term and you’re good! Nope – you’re now paying interest for a car that you no longer have.
Those who go into a car sales dealership already having established the total price, interest rate, and term of the loan (which equals a monthly payment) without even looking at monthly payments are less likely to fall victim to this trick. Although monthly payments are important, they should be saved until the end of all calculations to assess.
Mistake Two: Skip The Total Cost Calculation
People think about purchase price and maybe factor in insurance. And that’s it. But the total cost of ownership goes way above and beyond what someone initially spends.
Gas mileage is huge and it varies wildly per car. If one car gets 25 mpg versus another that gets 35, that’s an additional $800 per year. Over five years that’s $4,000. Maintenance goes wildly underappreciated as well – and some cars are cheap to maintain and others aren’t. Some need expensive parts and specialized service.
Insurance is sneaky, too. Two cars can be nearly the same, yet one’s insurance is way higher than the other. Theft rates and costs and repair safety ratings and features make a huge difference. Get your quotes before buying – not after.
Mistake Three: Buy Too Much Car For The Payment
There’s this myth that a car payment should be 10-15% of gross income. These are not random numbers. They are numbers that leave flexibility for saving funds and emergency expenditures.
But people push the envelope. They know they can “afford” it, so they do it without consideration for what else their finances may be giving up.
It’s not about whether you can “afford” a payment. It’s whether you’re “affording” by making that payment in the first place. Each dollar going to a car is a dollar not going toward savings, investment, or paying off debt. It needs to be about value.
Mistake Four: Falling Victim To Buying New
New cars smell good, look good, and nothing is wrong with them yet. But they’re horrible investments if someone wants to save money in the long run.
A new car depreciates by 20% as soon as you drive it off the lot. By year one it’s down 10-15% more. By year three it’s worth half of what you paid for it.
Conversely, a three-year-old used car has already depreciated. Someone else paid the price. You’re getting an essentially new car (sans paint job and miles) for 40-50% less than if you’d bought it new – right there, significant savings without even accounting for interest paid over time.
The argument for purchasing new cars is usually reliability and warranty coverage – but fair enough – but today’s cars are better than ever and can last longer than ever before! A three or four-year-old car with 40,000 miles on it still has good years left in it.
Mistake Five: Forgetting About Interest
In addition to getting good quotes from dealerships, people forget interest rates are just as important as purchase prices. Over the span of $25,000, 4% versus 7% interest equals about $2,000 over five years.
This is often a manifestation of credit scores as well. Someone with excellent credit will get 4% interest; someone with horrible credit will be paying over 10%. On that same $25,000 loan, 10% interest over five years equals about $6,000 versus around $2,600 at 4%.
If your credit isn’t up to par where you can at least get an acceptable interest rate, wait one or two months until it’s above average so that you can at least get a decent loan with decent interest. Pay off some debts; pay down debts; repair errors; let your score rise.
Mistake Six: Overvalue Everything Else
Extended warranties, paint protection for interiors/exteriors, fabric treatments, gap insurance – these are all options where dealerships upcharge. Sure, some add value – but most do not (at least at the prices they charge).
Extended warranties cover things you think they’re going to cover but they’re usually loophole central; gap insurance is only needed if you’re putting little or nothing down – but if you have equity in your favor (greater than a down payment), then it’s unnecessary.
These add-ons add $2,000-$4,000 onto loans – and you’re paying interest on them! Say no to most and save.
It’s the Big Picture
Each one of these mistakes alone may not have catastrophic failure. But added together? A dangerously expensive purchase becomes even more dangerous for now running it up into bad territory – a looooong term loan unnecessarily stretched for too much car with too high an interest rate and add-ons galore creates a perfect storm for financial disaster.
Avoid these mistakes and save thousands – and that’s not including what you’d eventually do with that money whether saving for retirement or putting back toward your house (or other debt payments). It’s not just about what you’re overpaying – it’s opportunity costs involved in car buying mistakes that matter most.
