Financial Planning

Buying a car is one of the biggest purchases you’ll make over the course of your life.

You’re spending several thousand dollars of your hard-earned money, so you can’t take the decision lightly. Don’t let a car dealer talk you into buying something you really don’t want and really can’t afford. Instead, ask yourself these questions before you buy the car.

1. Why do I need a new car?

Make sure you need a new car. Can you get by with your current car? Think about the reasons you need a new car.

Does your current car need repairs that are more expensive than the purchase of a newer car? Perhaps your family has outgrown your current car. Maybe a new car will cut down on transportation and maintenance costs. You may have several reasons for buying a new car, or you may not have a reason at all. Ask yourself this question to see.

2. Can I handle a car note, auto insurance, and maintenance costs?

When you buy a new car you’ll have more than a car note to think about. You’ll also have auto insurance premiums and maintenance costs. Depending on the car, your gas expense could go up.

If you’re not paying a car note right now, can you really afford to have $300-$800 of your monthly income going to car costs? Will buying a car right now interfere with your other financial goals like getting out of debt and saving for retirement? Seriously consider the ongoing financial impact of getting a car.

3. How much car can I afford?

The car you can afford is often different than the car you’re approved for. If you have a pretty good credit score, you might qualify for a larger loan than your budget can actually handle. Only you know enough about your monthly income and expenses to tell you what you can afford to pay for a car, not a lender and certainly not a car dealer.

Before you start shopping around, do some car math. Review your budget and figure out how much money you can afford to spend on a monthly car note. Then, multiply that number by 48 or 60 (depending on whether you want a four- or five-year loan, respectively) and add in any down payment you can make. That’s how much car you can afford to buy.

4. New or used?

Should you buy a new or used car? That decision will be largely based on what you can afford to pay. If you can’t afford to buy a new car, your best option is to buy a used car rather than overextend your income. Buying used doesn’t mean you’re giving up anything. In fact, it’s possible to buy a used car with more features than a new car that costs more.

Buying a new car has financial benefits, too. Maintenance costs can be lower, especially since the new car parts are less likely to fail. The new car warranty makes many major repairs are (close to) free within the first few years of the car’s life.

Cost and comfort are the two things you have to think about as you decide whether new or used is best for you.

5. What’s my credit like?

Unless you’re able to pay cash for your car, you’ll have to get a car loan. Auto lenders will check your credit history to determine the amount and interest rate of the loan. The better your credit history, the larger the loan and lower interest rate you qualify for. On the other hand, a bad credit history will lower your loan amount and raise the interest rate, making your car more expensive.

Before you shop for a loan, check your credit report and score. Bring past due accounts current. Pay off any outstanding collection accounts, judgments, and liens. This will raise your credit score and improve your chances of getting a good loan.

6. Should I have a down payment?

Absolutely. Even if the dealer or auto lender will allow you to buy your car without a down payment, you should have one. First, you can reduce the amount of your car loan if you’re able to save up a sizable down payment. Then, you keep your loan from becoming upside down. That’s when the amount you owe on your loan is more than your car is worth. When that happens, you’d end up losing money if you ever sell or trade your car.

7. What kind of car should I buy?

You have more options than ever with the type of vehicle you can purchase. The major choices include compact car, sedan, station wagon, SUV, truck, and minivan. Part of the decision depends on what you can afford. It also depends on the number of people you’ll be carrying in the car. For example, if you have a family of five, a compact car might not be the best idea.

Keep in mind that SUVs and trucks often have higher gas costs than some sedans. Write down everything you’ll be using the car for and use the list to narrow down your choices.

Before you make a multi-year commitment to paying a car note, remember that a car is not an investment. Spend time shopping around and preparing your finances for the purchase before you head to the car lot.