A Guide to Making Smart Car Purchase Decisions

Buying a car is more than just a mode of transportation; it’s a significant financial decision that can drastically affect your financial well-being. Every single one of us will run into this situation in our lifetime and more than likely multiple times over.

Let’s explore the key considerations for making a wise financial decision when buying a car.

Car Selection

Okay, so you need to buy a car. Maybe the car you’re currently driving is on its last leg, or your family is outgrowing what you have. There are many justifiable reasons to be in the market for a new car.

The first thing to consider is your primary use. Do you need to transport a bunch of kids to school and soccer practice? Do you simply need a commuter?

Look, I would love to have a souped-up F150 as much as the next guy, but aside from the occasional DIY project or bulky item that doesn’t fit in my Altima, I don’t have much need for one. Be realistic with yourself because this is a major decision that could significantly impact your overall financial health.

Next is reliability and maintenance. Does the car you’re looking at need to go to the mechanic every year to replace an obscure feature? Does the car brand require you to buy parts from that specific company? Ongoing maintenance costs can be a significant line item in your cash flow, and some cars have an extensive track record of higher costs. Do the research.


If you’re going through a dealership, don’t go in there saying $XXX is the amount I can afford monthly. They can extend the life of the loan to fit your budget. I recommend a general rule of thumb if you are financing, called the 20-4-7 rule.

  • 20% down payment
  • 4-year or less loan term
  • Annual loan payment is no more than 7% of your gross income

If the car you’re shopping for does not fit this description, you likely can’t afford it, and you may want to consider a different option.

At the time of writing this blog (Oct 2023), the average interest rate on new car loans is nearly 10% APR, and prices are near all-time highs. Consider purchasing a used car or using a credit union instead of the dealership financing option. This could give you a more favorable interest rate, and used cars are cheaper.

Additional Costs

There are several *hidden costs when you purchase a car that you must consider, as they are often overlooked.

Sales Tax: with almost everything that you buy, there is a sales tax. Cars are no different.

Vehicle registration: You know that sticker you stack on your back license plate every year? That’s your vehicle registration. If you’re buying a car that is newer than your current car, chances are your annual registration costs are going to increase.

Title and Documentation fees: These are fees you usually pay at purchase for transferring the title to your name and paying the dealership to process all of the paperwork.

Extended warranty: No, this isn’t just a phone call that you get from scammers; it’s actually a thing. Manufacturers have an original warranty that covers a wide range of high-cost repairs. You have the option to extend this coverage by purchasing an extended warranty.

Fuel: How does the new car's fuel efficiency compare to your old one?

Insurance: Newer cars generally have higher insurance premiums than older cars.

Buying a car is a financial decision that goes far beyond the initial joy of the new car smell. It’s a choice that can significantly affect your financial well-being in the short and long term. Car selection is more than just personal preference; it’s carefully evaluating your needs and budget.

Do your research; don’t just wing it; understand the implications and make a wise financial decision so your future self will thank you.