Buying a car can be a huge expense, and it’s one many people end up having to borrow money for. Whether you opt for a personal loan or a car loan, you need to make smart decisions during the purchasing process.
Finance expert Suze Orman has some tips to help you make sure you get the right vehicle without draining your bank balance and putting your other financial goals at risk. Here’s what she suggests, along with some tips on when and how to follow her advice.
1. Build a good credit score before buying
Orman’s first tip is to try to improve your credit before buying a car unless your score is already pretty good.
“Unless you must buy ASAP, I would advise anyone with a credit score below 700 or so to work on building up their credit score before loan shopping,” Orman explains. And this advice makes a lot of sense, because your credit score has a big impact on whether you can get approved for a car loan at a competitive rate.
The reality is, just about anyone can find some kind of car loan. In fact, there are entire dealerships that advertise themselves as loaning to borrowers with bad credit. But, these loans can often be much more expensive and not have very favorable terms. So, unless you absolutely must borrow to buy a vehicle immediately, focus on improving your credit score first through techniques like debt paydown.
2. Spend the minimum
Orman also suggests looking for a low-priced vehicle, rather than one with all the bells and whistles.
“Your goal should be to buy the least expensive car. Period,” Orman says, indicating this means buying a used car is the best choice for most people.
This advice also makes sense in most situations. A car generally does not go up in value (unlike a house, which usually does). And spending a lot of money on an asset that’s worth less and less each day you own it doesn’t make a whole lot of financial sense.
Of course, you also want a safe car that meets your family’s needs. But, ideally, you should look for the cheapest reliable and safe vehicle that’s big enough to transport the things you need to move around on a daily basis (whether that’s kids or cargo or both).
3. Choose a car loan with a short repayment term
Orman has some especially important advice about car loans — you don’t want one with a long payoff timeline.
“Your goal should be to finance a used car with a loan that is no longer than 48 months,” Omran says. “In fact, a used car you can finance with a 36-month loan is even smarter.” This advice is absolutely crucial because many people end up buying cars they can’t really afford just because they take out very long-term loans. A longer loan term makes the vehicle seem affordable.
You do not want to be paying on a car loan for 60 or 72 months for a lot of reasons. It’s a long time to commit to a car payment, and by the time you’re done paying for it, you could be just about ready to move on to a new vehicle (especially if you bought it used to begin with). A long car loan also means it’s likely you’ll end up owing more than the car is worth because you’ll be paying it off more slowly than it can depreciate in value.
A short-term loan means you can hopefully get the vehicle paid off and keep it for a long time after that, so you can redirect the money you would have been using for continual car payments towards your brokerage account or other important goals.
