You may have your sights set on a new car this year, but are you really ready to buy one?
A car is a big purchase, and there are several factors you’ll want to consider before making your decision. Some of them are out of your control, such as a limited supply of new vehicles. But there are other factors you can (and should) improve before buying a new car.
For instance, if you’re struggling to pay off debt, you may not be able to afford a new car payment right now. Let’s take a look at this and other warning signs that might indicate you should hold off.
Prices are still high
Car prices continued to rise in 2022 due to a computer chip shortage that many models rely on for both standard and extra features. The low supply led to fewer cars on dealer lots, pushing prices higher for consumers.
Automakers are starting to get the chip issue under control, but it may still take some time for demand to slow down. For buyers, that means prices will stay on the high end for a little longer. Instead of jumping into a new car immediately, consider waiting a few months to see if better deals pop up later this year.
Interest rates are going up
The Federal Reserve raised interest rates multiple times in 2022, and that trend could continue into 2023. For funding a new vehicle, rising rates means a loan will potentially be more expensive.
To combat higher interest rates, consider saving more for a larger down payment, so you don’t have to borrow as much for your new car. You should also shop around for a loan instead of accepting the dealership's terms right away. Another bank or financial institution may be able to provide you with a better rate.
Your credit score is low
A low credit score can hurt you in several ways when shopping for a new vehicle. For example, you might get charged a higher interest rate, or a bank may not even loan you the money altogether.
It’s a good idea to check your credit score before shopping for a new car and identify ways to boost it if needed. A bonus? Working towards a higher credit score can also help you become more financially secure in other areas of your life.
You can only afford a small down payment
How much you can put down is another factor that can have a big influence on whether or not it’s the right time for you to purchase a new car. Although no set amount is required, the total you put down determines how much you’ll need to borrow. A larger down payment means you’ll have to finance less, which can help you pay less interest over time.
See what loan options are currently available, and then calculate your payments over time with different down payment options. It may be better to hold off on your purchase if your monthly cost is too high so you can save more for a larger down payment.
You’re carrying too much debt
A car payment can be an expensive addition to your monthly budget on top of your regular bills and any outstanding debt on your balance sheet. You don't want to add a car loan with interest if you already feel like you’re floundering.
Before purchasing a new vehicle, outline a plan to pay off any large debts. This will put you in a much stronger position not only to make your monthly car payments but to potentially get a better deal on a loan.
You don’t have a substantial emergency fund
Life can throw curveballs, which is why it’s important to have an emergency fund. Although you can use these funds towards your car, you shouldn’t use them for a down payment or monthly payment. Rather, you should save these funds for unexpected expenses, like necessary repairs or medical bills related to a car accident.
Your current car is running well
A new car may be a nice thing to have, but is it something you need? Think about the costs for your current vehicle, including monthly expenses like gas and insurance. You’ll also want to consider potential maintenance and repairs and then compare this number to the price of a new vehicle.
It may be better to hold on to your current vehicle if it’s still running well before you start looking at a new car, particularly when other current factors could negatively impact the price, like short supply.
A new car is a big investment, so think twice before deciding whether or not you need a new vehicle. You should be in a strong financial position before adding such a large expense, and there are some ways to make extra money to add towards your down payment or to cover your monthly payment. Taking the time to understand if you can truly afford a new car is worth it to avoid any potential financial headaches down the road.