How to Thoughtfully Finance a Car or any Big Ticket Purchase
It’s hard to let go of your old car. You know which car I’m talking about. The car with the window taped shut because it doesn’t roll down properly. The car with three paint jobs—each a different shade of green. The car that gets shaky after you reach 65 mph, because it was a hand-me-down from your grandma, who’s max freeway speed is 50 mph. It’s been with you through it all, but when car dealerships start advertising 0% financing and cash-back deals, you might feel yourself loosening your grip.
Before we dig in, it’s important to acknowledge that even though good deals are currently out there, you may not need an upgrade. And that’s okay! Own your steady, functional car, and avoid instant gratification. However, sometimes things do happen that require an upgrade. Your tape job suddenly malfunctions, and your car window won’t roll up in mid-January. Or your car starts shaking at 50mph on your morning commute instead of 65mph.
When planning for a big expense, whether it’s a car or another large purchase you plan to finance, it’s best to create savings goals. But because life is both expensive and unpredictable, this post aims to discuss ways to finance a large purchase in a smart and efficient way. Here’s your list of action-items:
FOCUS ON WHAT YOU ACTUALLY need
Create a list of your needs (not your wants), and then research your options. If you need a car, what kind of car do you need? Something that can haul large objects, or carry the tiny humans safely? Used or new? Find the total cost of the car that can sufficiently meet all your needs. Avoid any options that may push you outside of your budget. Basically, don’t buy more car than you need.
Decide how to finance the purchase
If you cannot purchase the expense in full, you have two financing options: (1) a lease or (2) a loan.
Know that when assessing the total cost of the car, it’s important to leave room for the expense to finance the car through a loan.
Lease: When you lease a car, you are paying monthly to use the car. Because this finance option doesn’t lead to car ownership, monthly payments for leases are typically lower than loan payments. However, you will not be able to ever own the car or “pay it off.” Because of this, leases will never be profitable and are best saved for professional purposes if necessary.
Loan: When you borrow an auto loan, you are paying monthly to eventually own the car. There are many loan options depending on your budget, credit score, and timeline. Most loans will have an annual percentage rate (APR). That is, the interest rate you pay on the loan. The APR will vary based on the duration of the loan, your credit score, and where you borrow from. Make sure you shop around to find the best loan that meets your needs. In short, try and find a loan with a low APR and pay it off as quickly as you can. Click here to view Rivermark’s auto loan options.
Calculate the monthly payment
In order to budget for your new expense, you need to know the amount of the monthly payment. Let’s say you want a 2020 Subaru Forester because let’s be real, if you’re a true Oregonian, you’ve thought about getting a Subaru at least once. Using data from their website, here’s the breakdown:
Find the cost of the car: $24,495
Pick a Finance term: 48 months
Know the APR based on your credit score: 4.19%
Calculate the monthly cost of the car, including the APR:
Ta-dah! Your monthly car payment is estimated to be around $700, making the estimated total cost of the car $33,600.
Let’s take a moment to catch our breath. I know this seems stressful, but don’t worry. Make sure you are taking care of your credit score and budgeting for the expense. If you take the appropriate and smart steps, you’ll be okay!
Simulate the payment INTO A MONTHLY BUDGET
Before deciding to finance the car, take three months to see if the monthly payment fits in your budget. Whether it be through automatic transfers or manually setting money aside, try not to house the simulated monthly payment in an account used for spending purposes. If you don’t have a budget, click here for resources to get started.
This practice will allow you to visualize how your car payment can fit into your budget. You may need to re-allocate dollars in your budget, or you might find you have more wiggle room than you initially thought!
What are you waiting for? Get the car!
You earned this! You took the smart and appropriate steps to finance your car, so make it happen and create new memories. We are rooting for you.
