For many people a car is a necessity. Whether it’s going to and from work or school, it’s hard to make money and move forward in life without one.
Some people will have access to public transportation, but it can be a hassle and others simply do not have access to public transit.
There are many things to consider when you buy a car, but today I want to focus on 3 financial factors you must consider. These 3 things factors should dictate the amount you spend on a car as well as what type of car you end up getting.
1) Financial Goals & Priorities
Financial goals, both short- and long-term, should be factored in when purchasing a car. For example you may desire to renovate your home in the near-future. If the home renovation is your priority, it’s better to spend less on a car because every dollar you spend on a car (or elsewhere) is a dollar that could have gone towards the home renovation.
Additionally many people have debt, some more than others. If paying down debt is a goal of yours, it might make sense to get a car that is relatively inexpensive. By spending less on a car you may not get the “coolest” looking car, and it may be a few years older than you’d like, but you’ll end up saving money and reaching your debt pay-down goal faster.
On the flip side, some people have long commutes and having a comfortable car to drive could be one of their top priorities. It really all comes down to the individual and their goals and priorities.
2) Access to Financing
Access to financing is another financial factor that must be taken into consideration when buying a car. If you need a car but don’t have the full amount to pay for one, you will need to access financing.
In some cases it makes sense to get financing for a car even if you have the money. For example, if you have excellent credit you can get a loan through a company like LightStream for an interest rate as low as 3%. Taking this loan will allow you to invest money in the stock market, which typically has returns well in excess of 3%.
Additionally, if you have bad credit consider looking into loans that are lower in dollar value and have a shorter payback period. This will minimize the amount you lose in interest payments.
3) Income
The final thing that you must consider when buying a car is your income. If you take out a loan for a car, you need to make sure you actually have the income to pay it back.
Before taking out a loan or buying a car, make sure that your income can support the additional payment. For example, if the payment will stretch you so much that you will have trouble saving money, you should really consider purchasing a cheaper car. Keep in mind that cars will come with other expenses that need to be supported by your income.
If you take your financial goals & priorities, access to finance, and income into consideration before buying a car you are much more likely to make a purchase that fits into your personal finance situation.
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Photo by Carissa Rogers
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We choose cars mostly for practical reasons. All it needs to do is get us from point A to B. Neither of us drive very often. Greg drives to work but it’s only 5 minutes away.
All good things to look at, though I think many don’t even look at the real financial aspect of a car purchase – just if they can “afford” the payment. I was reading an article the other day that was arguing that a SUV was the new starter home because of how high payments have gotten and how many have gotten them. At any rate, we go really for the practical reasons though we don’t even drive that much these days working from home. :)
I unfortunately have a long commute which is why I got a newer used car about 4 years ago. The bad thing about long commutes is that I rack up a lot of miles so I’m hoping my car lasts awhile. Fortunately we live in a neighborhood which is very walkable and the transit system is top notch so we don’t always have to drive.
Holly at ClubThrifty Wow 5 minutes, not bad! My most recent purchase – a Kia Spectra – was definitely a “practical” choice. I think it was the best value. Super cheap car and reliable enough to make it a good buy.
FrugalRules Cars and vehicles become a bit of a “non-issue” when you work from home. You still need it for time outside of work, but it’s not something you factor into your finances (or overall income from a job – I definitely deduct the costs from my income to get a “truer” view of how much I make at my job).
Andrew LivingRichCheaply I also have a fairly lengthy commute, so I bought a newer used car this year. It really was on the lower end of quality (Kia Spectra) and I think if I could justify a nicer car I would upgrade solely for comfort purposes.
This is such good advice!! I really wish I would have been more into personal finance when we bought our SUV about a year ago. We have a six year loan and a payment of $336 a month. Our interest rate is AWESOME (less than 3%), but that’s no excuse for buying such an expensive car!! We definitely could have looked around more and found one for a better price, but we bought it “in the moment” and are now stuck with a payment. I do love the car though, haha!
Sarah Brooks We got a Ford Escape this year and it’s a really great vehicle. It’s not fun making the payment, but we also got an incredible interest rate. With an interest rate that good I can’t help but pay the minimum each month – no reason to contribute more when you can invest it instead.
We always buy cars for cash that are around $3000 or less. However, Jay can fix almost any car problem, so it’s not the best avenue for everyone. I don’t mind a car that’s around 10 years old as long as it’s pretty, clean, and dent-free. OH, and it has to be a minivan for hauling large things like furniture. They’re so roomy and the stuff is inside and protected.
Great tips, DC! :)
Before any of my clients get a new car, I tell them to think about how much they plan to spend and then start saving that monthly amount in a designated “car account.” This gives them the opportunity to live with this new expense in their budget but also build a savings for a car down payment.
kay ~ lifestylevoices.com That’s a HUGE bonus that Jay can fix car issues. That must have amounted to tens of thousands of dollars in gains over the years. Not sure I can get behind the mini van, though ;)
blonde_finance That’s a really great idea, Shannon! That would definitely give you a good indication of whether you can afford it or not, and then adjust before actually taking out the loan.