You’ve been admiring that shiny vehicle in the dealership window, daydreaming about all the places it will take you. But before you sign on the dotted line, there are a few key things to consider when determining if you’re truly financially ready for this big life step.
I know firsthand the importance of being mindful of money – especially when it comes to making large purchases like a car. That’s why I have developed these 6 steps so that anyone can assess their financial readiness and make sure they stay debt-free when buying their first car!
① You have sufficient income
The thought of buying your first vehicle can be overwhelming, but there is one easy way to know when you are ready: having sufficient income. Purchasing a car is a huge financial commitment and you must make sure you have the means to commit without compromising other areas like rent and food.
A good exercise is calculating the estimated cost of ownership for any vehicle including insurance, gas, and maintenance costs for an accurate picture of what’s in your budget. After calculating your car payments, deduct that from your monthly income to ensure you can cover the cost without going into debt.
A great indicator will be if you have enough saved up to cover at least 3 months of payments, or better yet if you have enough saved up for the entire cost of the vehicle – this shows that you are prepared to handle whatever comes your way after the purchase.
② You aren’t overextending your budget
The best way to know if you’re financially ready for a car is by taking a close look at your budget. When it comes to car payments, there is a general rule of thumb to follow: car payments should never exceed 15 percent of your total income. Otherwise, you risk overextending yourself and falling into the dangerous cycle of debt.
One way to prevent this is by making a list of all your bills and expenses – like rent, utilities, food, and entertainment. Subtract that from your monthly income and divide the remaining amount by the estimated car payment to make sure you’ll have enough left over for other living expenses.
③ You have saved enough for a down payment
If you’re thinking about buying your first vehicle, saving for a down payment is one of the best indications that you’re truly ready. A down payment gives you a place to start and puts you in a much more favorable position when it comes to bargaining with dealers or bargain-hunting on used vehicles.
Having the cash saved upfront gives you more leverage when negotiating prices or financing rates. And last but certainly not least, a down payment makes it easier to budget for gas and maintenance, since they will already be accounted for in your monthly car payments.
④ You think before you spend
Making a large purchase such as a car is not something to be taken lightly. Before you buy, make sure you think before you spend. Consider whether you really need the car, or if you could settle for a cheaper one instead. Look into used cars and weigh the advantages and disadvantages of both.
Do your research and read reviews so you know what you’re getting into. It’s also a good idea to shop around, compare prices, and make sure you are getting the best value for your money.
Lastly, don’t be afraid to negotiate and haggle to get the best deal possible. Having a budget in mind before you walk into the dealership will provide structure and help set boundaries.
⑤ You are caught up on all bills and debts
One way you know you are financially equipped to buy your first vehicle is if your bills and debts have all been taken care of. It would not be wise to take on additional expenses or add to your debt load until those already existing debts have been paid off.
It’s important to keep this in mind before making any large purchases, such as buying a car – or any other big-ticket item. It would be best to wait until you have paid off all your outstanding debts and established good credit to ensure that you get the best loan terms.
⑥ You have built your credit
A car purchase is a major financial decision, and having a good credit history shows that you are capable of responsibly managing your finances.
Building your credit over time will give you access to the best deals on loans when it comes time to purchase a vehicle. Having a good credit score makes the process of securing payment simpler because banks and dealerships know that they can trust that you will make your payments.
According to Experian, the higher your credit score is, the less likely you are to miss a payment. Having a good credit score also provides peace of mind that the loan won’t lead to hefty interest rates or other unexpected surprises. Here are some of the quickest ways to build your credit:
1. Get a secured credit card to start building your credit history
Using a secured credit card is a great way to build your credit quickly, as it reports your use of credit to the three major credit bureaus. A secured card is one that requires a cash deposit upfront; the amount of the deposit usually determines your credit limit.
2. Make on-time payments every month to improve your credit score
Making payments on time is crucial when trying to build a healthy credit report. Make sure you always make payments at least by the due date to avoid any late fees and ensure that your credit score is not adversely affected.
3. Keep your balances low
Your credit utilization ratio, or the amount of credit that is available that you are using compared to your total available credit limit, is one of the most important factors in calculating your credit score. It’s best to keep your balances low and use less than 35 percent of your credit.
4. Don’t open too many new accounts at once
Opening too many accounts in a short period of time can significantly lower your credit score, as it looks like you are trying to take on too much debt. Instead of trying to open multiple accounts all at once, spread out your new accounts over a period of time.
Once you have built your credit and saved for your down payment, you’ll be confident in knowing that you’re ready to take the next step toward getting your dream car!
Final Words
If you’re wondering whether or not you can afford to buy a car, the answer is maybe. It depends on your financial situation and how much of a burden you’re willing to shoulder. But if you follow the steps I’ve outlined above, do your research, and make a sound decision, you should be just fine.