There comes a time when you need a new(er) car and will require financing to pay for it. But, it’s a very different thing if you just want a new car. Since this is probably the biggest investment you’ll make next to the purchase of a house, you mustn’t enter into it lightly. Buying a car and getting a car loan to pay for it when you’re not ready can lead to major financial problems down the road.
If you’re sitting on a car that’s in good shape, gets you where you want to go and does it reliably, hold off on getting a new car, especially if the only thing urging you to get one is vanity. If you attempt to take out a car loan while you still owe money on the car, you’ll wind up rolling the balance of the previous car loan into the new loan paying interest on that money as well. This can cost you thousands of dollars over the term of the new loan and leave you even more upside-down than you were before.
But, circumstances may demand that you get a new car and that need presses you into getting a car loan. If you’re in good shape, financially, applying for a new car loan to buy a replacement can be done without having to settle for a high interest rate. If you owe more on the car than it’s worth, the key is shopping around to get auto financing with a reasonable, even low, interest rate in order to keep that car loan from over-stressing your budget. Remember, it’s a good credit rating that keeps you from having to pay high interest rates.
Know your credit score and obtain your credit report. Make sure that the report is accurate and the score reflects it. Errors in your credit can be disputed. With any inaccuracies in your report cleared up, your score will improve. But, don’t expect miracles. Correcting problems with your credit report as well as doing all the things necessary to improve your credit score take time and you don’t want to dive into a car loan before you’re ready. Without all of financial documentation in order, you’ll end up paying more in loan costs and in interest – and, mounting debt.
As you accrue more debt, you affect your ability to get a car loan in another way. A lender will examine your debt-to-income ratio in determining your ability to pay off that loan. If you your debts exceed your income by uncomfortable levels, your lender will likely not approve your car loan application. This should be a clear indication that you might want to put off that car loan until you’re on solid footing with your finances. Pay down your debts as quickly as possible and resist the urge to open new credit accounts.
Don’t be tempted by the hottest new car models or get sucked into the wild advertising claims of car makers, car dealers, and some lenders that your credit problems can miraculously go away. It’s possible to fix your credit with patience and careful budgeting. Once you’ve gotten your finances in good shape, don’t undo it all by taking on the burden of a new car loan too soon. Make that car you have last a little longer and only shop for your next car when you’re really ready.