How to Buy a Car Without Going Too Far into Debt

Most people these days have figured out it is better to purchase something with cash than on credit. If you live anywhere but an urban area, you most likely require a car to get to and from work and to get your business done. Needing a new car is bad enough without having to go deep into debt to buy one. So, how can you plan ahead to make sure that you don't get in to debt over your head on your next car purchase?

1. Before you need a new car, begin now to think about how you can get ahead financially so your next car purchase in 3 or 4 years won't cramp your budget too much.

2. Take a look at your budget and make a decision to bank at least $10 per week in a separate account. This is an amount that many people spend weekly on coffee or eating out. Even though it is a small amount, it builds over time. Let's say you deposit the $10 a week every week for 4 years. That adds up to $2,080.00. Not bad and it probably didn't even hurt.

3. Plan to drive your current vehicle a year or 2 after you pay off your car loan. Then, during the year or two with no car payment, open a special bank account ( or use the account you opened for #2 above), placing the amount of your old car payment into your account every month. This way, you are literally paying yourself for the "car payment" each month. This amount of money will accrue over time. You will have a decent chunk of cash to apply for your next car purchase when the time comes. Let's say you paid $350.00 per month to yourself for 24 months. This means you saved $8,400 in 2 years toward your next car purchase. If you also did #2 (paid yourself just $10 per week) above, you now have saved over $10,000 toward your next car purchase.

4. Before you go shopping for your new vehicle, do some research on the internet to compare your top 3 or 4 vehicle choices. Websites such as Edmunds or Kelley Blue Book allow comparisons of vehicles to educate you and help you decide the best car for your needs. Then, check out pricing for cars using Edmunds pricing information pages to be well-informed about the worth of the car(s) of your choice. Take notes if you need to.

5. If you do not have enough cash to cover the entire cost of the vehicle you desire, talk with your loan institution (hopefully, a credit union) in advance of car-shopping to see what kind of loan rates you can obtain. Remind yourself to be conservative about the amount you are considering to borrow. After all, the whole idea here is to reduce your car debt. A suggested borrowing limit is 50% of what you have saved. So, in the above example, since you have saved $10,480 ($2,080 + $8,400), don't consider borrowing over $5,240.

6. Begin shopping for your car. Do not make an emotional decision. If you did your homework (see #4 above), you know what you want and how much it should cost. Don't think "extravagant," just be realistic about your needs for the vehicle. Do not allow any salesperson to pressure or rush you into buying a car. Take one or two friends to be your support through the process so you don't make a bad or impulsive decision on your next car purchase.

7. After you decide on the car and make the deal, try to get your car loan spread over a shorter amount of time, say 18 to 24 months. Since you borrowed a mere fraction of what you have borrowed to purchase a car in the past, there is one more suggestion to keep your debt low: make double payments every month to pay the car off in half the time. This should be possible, given the small amount you were able to borrow and the fact that your payments were probably much less than prior car payments. If you can't pay 2 full payments monthly, then apply extra dollars that you can afford to the loan to quickly pay off the car loan.

If you are able to accomplish #7 (pay the car off quickly) you will have even longer to pay yourself the monthly payment discussed in #3. Doing so for, say 3 or 4 years could very possibly result in being able to pay for your next car with the cash you saved ($350 per month times 40 months=$14,000 saved, for example).

Planning to buy your vehicles in this way works remarkably well. If applied correctly, each time you make a new car purchase, you will be financing less and less, until you get to the point you can simply pay cash for a car without getting a loan.

Once you begin to follow the above plan, you will be amazed at how quickly the money adds up and how secure you feel that you were able to save up such a large percentage for your next vehicle. Following this method will also demonstrate that you are capable of saving large sums of money for other expenditures, such as vacations or even stocks and bonds. Changing your relationship with your money and how you manage it can change your life in ways you cannot even imagine.

Sources

Edmunds website.

Kelley Blue Book website.

Personal experience.