thinking of buying a car?

     In the article, I am going to try my best to give a high-level overview of what goes into buying a vehicle, if you should buy a vehicle and all the details that can get confusing during the process.

     1. Should you buy a vehicle? This question is personal and everyone is different and in different situations. That being said, we are going to base this question on your financial ability. We will stick to the principles and the facts, but again, know that these are guidelines and rules of thumb, not hard and fast rules.

First thing first, can you afford the vehicle? For some of you, maybe you can afford it only when you can pay cash for it. For others, you may just look at the monthly payment. But for the scope of this article, I want to just state the facts and let you make the decision for yourself.

     To get clarity on knowing if you can afford the vehicle, you first need to understand what you are buying. You are buying a “depreciating asset.” This means that over time the vehicle is going to decrease in value and you are going to most likely sell it for less than what you paid for. So let’s say you bought the vehicle in cash for $30,000. The vehicle is yours and you won’t have the stress of making the payment every month. Out of the money you earn, not one penny will go to paying off the vehicle. You can use the money you would have used to make the monthly payment and use it for other things or investments. But, the fact remains that when you decide to sell it one day, the vehicle will have money likely depreciated, and you won’t get all of your money back.

     Let’s look at the second option. Say you want to get a loan against the vehicle, so you go to the bank and they give you the $30,000 loan to pay for the car. After that, it is your responsibility to make those payments. I’m this scenario, you are getting hit in two ways. Number 1… your vehicle is depreciating, and number 2, you are paying money that could have been used for investment or other things.

     The truth is that I would say most of us, would choose the second option even though it may not be the “smart” decision. So how many vehicles can you afford? Well to find this answer, we need to take a dive into your budget. If you haven’t created a budget, I would highly suggest doing so.
There are many different ways to budget and much different software or lack thereof to do so. The main goal, when you look at it objectively, is to know exactly where your money is going and how much of it is going. After taking a look into your budget, you may discover that you have some extra income. But just because you “can” afford it doesn’t mean you should. That’s where your debt to income comes in. The debt-to-income ratio lets you see the percentage of your income going to your debt obligations. This ratio will also be used by your lender to determine if you are approved. At the end of the day, it’s your decision, but as a general rule of thumb, I like my debt-to-income ratio to be 30% or less of my NET income. If you would like help figuring out your debt-to-income ratio…click here.

2. You’ve decided to buy the vehicle.

If you choose to buy the car with cash, it’s a fairly straight-to-the-point process. You will buy the car from the dealership or individual, get the title, and register the vehicle in your name, etc.

If you decided to finance the vehicle, your bank will loan you the money and you will use this to purchase the vehicle. The difference is that you will have a lien on the vehicle and your bank will be listed on the title if that’s who gave you the loan. From my experience, the bank will physically hold onto the title. You will still register the vehicle in your name.

You will almost likely also need insurance on the vehicle and you should factor that into your budget as well. Call your insurance agent to get a quote before you buy the vehicle to make sure it fits within your budget.

Buying a vehicle can be a fun experience, but don’t make it into a burden. A car should enhance your life, not take away from it.