We all have friends who have financial troubles, and I'm no exception. I actually think that I might hear about my friends financial issues a little more than most people, because I am so interested in the topic. For this reason, it makes me even more crazy when I see people making poor decisions with their money.
I see a lot of bad decisions, and I make them myself. What's interesting is that it seems like about half of those bad decisions involve cars. My friends buy new cars when they don't need them, can't afford them, and have other financial issues that mean that it is exactly the wrong time to be buying a new car.
Here are five signs that you shouldn't be buying a car right now:
You Have No Emergency FundEmergency funds are the first step in almost every popular financial plan. There's a good reason for that. If you don't have an emergency fund, you will have to go into debt when financial surprises happen, and that's exactly the opposite of financial stability. Delay your car purchase for a month or two and build up that emergency fund. What? You can't save $1,000 in two months? Then you can't afford a car payment.
You Need To Buy GAP InsuranceIf you are financing so much of your car purchase that you need to purchase additional GAP coverage, you aren't in the right place to be buying a car. Select a different car, find a larger down payment, or delay your purchase until you can put down a large enough down payment that there is no need for GAP insurance. As my smart friend Rob Aeschbach says, "How do you know if you can’t afford that new car? If you need gap insurance, then you can’t afford it."
You Have One or More Other Large Expenses Hanging Over Your HeadI have seen friends buy new cars when they had serious electrical issues in their house, when they had just consulted with me about how to manage their overwhelming credit card payments, and when they had just asked me how to afford some home renovations. Nothing makes a financial counselor more frustrated when they've been working with a client on a debt reduction plan and they come in and announce that they've bought a car. And it happens ALL THE TIME.
You're Headed Into A Transition Of Any KindWhen life is in upheaval, you don't need to be stretching your finances. Unless you have cash up-front, you should not be purchasing a new vehicle just before a Permanent Change of Station (PCS) move, right before you leave the military, or before any other major change. Yes, sometimes it is impossible to avoid, especially with PCS moves in and out of the country, but try to minimize the damage. I wish I had a photo of the 1997 Civic my husband is driving; it was the smartest choice when we moved back from overseas and were planning a major home renovation. It's not pretty, but it gets him back and forth to work, we paid cash, and that purchase kept one small corner of our finances stable during an otherwise crazy time.
You Need A Loan, And You Can't Get A Good Interest RateSometimes, financing a car is unavoidable. JJ Montanaro has explained the things to avoid in a loan; if you can't follow those guidelines, you probably need to delay your car purchase. The difference in cost between a low interest loan and a high interest loan is amazing. Let's say you buy a $25,000 car and you finance it for four years. With a 3.00% loan, you'll pay $554 per month and a total of $1561 in interest over the term. With a 10.00% loan, you'll pay $634 per month and a total of $5,435 in interest over the term. While both those monthly payments give me the willies, the difference in interest is truly astounding. I can't imagine spending an extra $4,000 to pay for the exact same car.
Now, I know that we can't always control when we buy a car. An accident or serious breakdown can mean that we need a new car before we've saved the funds. In that case, buying an inexpensive vehicle to tide you over is smarter than buying a new car you can't actually afford. If you fall into any of the five groups above, your financial situation is already unsteady. Adding a car purchase is a bad idea, so avoid it if you can.