Paycheck Chronicles

Planning For A Car Payment - Do It The Right Way


I spend a lot of time talking to people who are just starting the journey of getting control over their money.  There is one idea that I hear over and over again and I see it as a red flag for future trouble.  "We don't have a car payment now, but we will next year."  Or something similar.

I have a couple of questions for that statement:  "Why will you have a car payment next year?"  "Are you saving for your car purchase now?"  "Where is that going to fit into your budget?"  The answers are interesting, and can tell a lot about how prepared that person is for the purchase.

About Those Car Payments

Now, I am perfectly capable about being judgemental about auto loans.  They tie up your monthly budget, and they encourage people to buy cars they can't really afford.  But I am willing to concede that there are some times when borrowing to buy a car is a necessary evil, or maybe even a wise choice.  Maybe Murphy has hit your house too many times this year, and your car just irreparably died.  Maybe you got a zero interest loan deal and you can keep your car money in the bank earning 3% in special CDs.  Maybe you just found out you are expecting triplets, you live far away from everything, and it is absolutely essential that your car start every single time you load up.

A loan for a car may be necessary in select situations, there are several steps you should be taking if you see a car payment in your future:

Seriously Evaluate Your Needs

When it comes to cars, most needs are basic.  At least one car in your family probably needs to hold everyone in your household.  It needs to start and it needs to be safe.  Depending on your location, and how your job feels about you showing up a hot mess, you may need air conditioning.

Then there are "almost needs."  For example, if you have four kids who need to be buckled into car seats by Mom or Dad, you might need a car where you can configure the seats so that the grown-up isn't pretzling to reach those buckles.  If you have someone with mobility issues, you might need a car at a certain height.

Lastly, of course, are the wants. I want our next car to have Bluetooth.  I want our next car to be a hybrid.  I want my next car to have heated seats.  But I know those things are just wants, not needs.

Research Your Car Choices

Once you've realistically thought about your absolute needs, start doing some research.  Go online, and read about the cars that fit your needs.  Stop by a dealership, do a look-see, maybe even do some test drives.  Get an idea how much money you are planning to spend.  See whether you can find something that works within the budget that works for you.  You might be surprised - I've been researching our next car purchase and have found plenty of fancy-schmancy options for less than $10,000, and plenty of less schmancy options for less than $7,000.

Start Making That Payment Now

If you anticipate the need for a car payment in your future, you should start making that car payment into a car savings account right now.  This accomplishes two goals:  it gets that payment into your spending plan, and it helps you build up savings so you aren't financing as much.

Let's say you think you're going to buy a $10,000 car, and you plan to finance it for 3 years.  Using a randomly average interest rate of 5%, your payments would be $300 per month.  Start this month putting $300 each month into a car savings account.  If you can't afford that, you can't afford a car loan with $300 payments.  Emergency aside, you want to do this for a minimum of six months, preferably a year, and ideally longer.  If you can make 12 months of $300 payments into your car savings account without any financial struggles, you will have $3,600 plus a smidge of interest to put down on your car.  This means you would only need to finance $6,400, and you could pay that off in less than 2 years if you kept the same $300 car payment.

Figuring out your financing before you go to buy a car. Most of the time, your local credit union has better offers than whatever the dealership is offering. There are exceptions, when the dealer is offering promotional financing, but you want to know what terms you can get on the open market. When getting pre-approved by your bank or credit union, don't ask for approval for more than you plan to spend. This helps keep you on budget when you are shopping.

I don't like auto loans, but I understand why they can be necessary.  If you're going to get a loan for an auto purchase, be smart about it. Don't wander into a dealership and walk out with the shiniest model, financed on the dealer's terms.  Be an educated consumer who is buying the right car, at the right price, with the best financing offer available.  Your wallet will thank you in the long run.

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