Your 5-minute guide to car expenses

The cost of a car is a lot more than the sum of its payments. It's the gas, the repairs, the insurance, the parking. It's the lost opportunity to do other things with your money as well.

Your homework should involve a lot more than a test drive. In fact, it starts with simply doing the math. Consider this: If you're 25 and buy a $20,000 car rather than a $30,000 one, and sock away that 10 grand in a Roth individual retirement account at 7%, you'll have $160,000 to retire on. (See MSN Money's Savings Calculator.)

And consider these points:

• One rule of thumb is that you should spend no more than 20% of your household income to buy and operate car.

• If you don't have a car payment now, consider whether you're willing and able to take one on. Try putting aside a car payment, say, $500, each month for three months and not touching it. Are you able to live easily without that money? Would you really rather do something else with it? (See "Keep your old clunker or buy a new car?")

• Have a realistic idea about the value of your trade-in. (You can find Kelley Blue Book values here.)

• If you owe money on your current car, rethink any plans to buy a new one if your loan is "upside down" -- if the car isn't worth what you owe. Rolling over debt is the fast track to real trouble. You'll pay higher interest rates because what you owe isn't secured by the new car itself. (See "The real reason you're broke.")

• Look further ahead than the monthly payment. Choosing a car that requires premium gasoline will cost you several hundred dollars more a year. Choosing a car equipped with summer-only tires could force you to buy another set for winter. Satellite radio? That'll cost $140 or so a year.

• Consider your credit. Loans for people with marginal credit have grown increasingly more expensive. A few months' work on your credit rating could pay off in a loan rate several points less expensive. (You can get an estimate of your credit scores here.)

Still not ready to roll

• Get a feel for what's out there. (Check MSN Autos' 2008 model year review or used-car listings at AutoTrader.) Unless you're a gearhead or intensely brand-loyal, you should find several models to compare and test-drive rather than fixing on just one.

• Resist the urge to pay sticker or more for a high-demand car. Demand -- and selling prices -- always fall. Remember the New Beetle and the PT Cruiser?

• Call your insurer for full-coverage rates on the cars you're considering. (You can compare the relative risk for theft, injury and collision repairs for different cars with MSN Money's Auto Risk tool.)

• Contact your local motor-vehicles department to see what registration and licensing would cost. You probably will roll the first year's costs into your loan, but the hit can be substantial in subsequent years in states with yearly fees based on the value of the car.

• Arrange financing. You can get an idea of rates here. You should apply with at least one bank or credit union. (If a bank won't lend you money for a car, you really shouldn't be buying one until your credit is repaired. A car dealer probably can find financing for you, but you will pay dearly for it.)

• Do a reality check. If you have little to no down payment, you are upside down the second you leave the dealer's lot. The longer the loan, the longer you'll stay trapped that way. Aim for 48 months; that way you can get a few payment-free years before the car begins to need major repairs -- and you'll have positive equity much more quickly. (See "Will the loan outlive the car?")

Continued: Trade your old car?

 1 | 2 | 3 | next >

Rate this Article

Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). Low

Thank you for rating.

High

• View all top-rated articles
• E-mail us your comments on this article
• Discuss in a message board