How to Avoid Buying a Car You Can’t Afford
There’s nothing quite like the feeling of owning a new (or new to you) car. That’s why if you’re considering buying a new or used vehicle in the near future, you’ve got plenty of company. Americans purchased an astounding 17.85 million vehicles in December of 2017 alone.
That also means that the number of auto loans and debt has also been on the rise. There are already over 100 million outstanding auto loans in the United States, and that number has been growing, according to data from the New York Federal Reserve Bank. The statistics also revealed a worrisome trend, however. Of those outstanding loans, 4% have payments that are more than 90 days past due, a number which is also growing. Showing some care when choosing a car has never been more important. Here’s what to consider.
Have a Realistic Budget
The first thing you need to figure out when setting out to find a vehicle to purchase is how much money you can actually afford to spend. To keep yourself out of trouble, be honest with yourself regarding your expenses, and don’t try to sacrifice too much. The rule of thumb to follow is that your auto expenses, including monthly payment, insurance, upkeep, and gas costs should not exceed 20% of your take-home pay each month. Make sure that the amount you arrive at won’t represent a stretch or an ongoing burden, so you won’t be in danger of falling behind.
Choosing a Vehicle Based on Need
When purchasing a vehicle, it’s important to carefully evaluate your needs and compare them to your means before making any decision. Part of the reason that consumers are having more trouble keeping up with their auto loans is that they’re choosing to purchase vehicles that are more expensive than necessary, and assuming larger debts. They rationalize it by extending the repayment length. Even so, that type of decision making has pushed the average monthly auto loan payment up to $517, which would have been unheard of just a few short years ago. To avoid over-committing yourself, buy the car that fits your needs and budget, instead of the car you fall in love with.
Believe it or not, studies show that only about 44% of people shop around when looking for a loan. The problem is that lenders have seen this statistic too, and they’re not going to do you any favors. If you can find a loan with an interest rate that is even a half of a percentage point lower, it will save you hundreds of dollars over the life of the loan. Take the time to compare offers on multiple auto loans to save the most money. If you’re worried about hurting your credit score, be aware that credit agencies count multiple “rate shopping” requests as a single inquiry. That means it won’t hurt to check with as many lenders as you can.
If you’re realistic about what you can afford, your new car will give you years of reliable, enjoyable service. If you’re not, your lender will be making an unannounced visit to take your car away from you. It should be obvious which the preferable outcome is. Even if you have your heart set on a more expensive model than your budget will allow at the moment, take heart. Making a responsible choice now will lead you towards a more secure financial future that may even include the car of your dreams.