How to Avoid Debt Regret When Buying a New Car

Person filling out finance paperwork while buying a car
(Adobe Stock)

Over the years, I've offered up what I think are some pretty solid car-buying tips. Those ideas include keeping your car payment(s) to around 10% of your gross monthly income, checking your credit in advance of the purchase, researching your car choices, going in with a firm budget and driving your car until the wheels fall off.

All those points remain solid. However, after perusing Experian's State of the Automotive Finance Market for the second quarter of 2021, I'm back on the subject. The report highlighted a disturbing trend with respect to car loans. They are getting longer and longer. So with a focus on the loan part of the car-buying process, here are four tips to keep you on track.

  1. Avoid the loan. It probably seems obvious, but being a cash buyer is the quickest way to ensure that car expenses aren't eating up too much of your budget. Just got a new car? Well, set up a savings account today and start stashing some money for that next vehicle purchase in 2028 (two tips in one; see how I did that?).
  2. Maximize all the bennies. Interest rates remain low, and you may be able to lock in eye-popping rates before you set foot in the dealership. This could free you up to take advantage of a cash-back offer in lieu of accepting the dealer's financing. Even if cash back isn't available, you'll already have competitive financing in place ... financing the dealer can beat, if they want your business.
  3. Don't go longer to make your payment manageable. That's the trend as 72- and 84-month loans are now commonplace in the market. According to Experian's report, more than a third of new car loans were for terms over six years. Don't do it. If you must use a loan, shoot for one with a term of 60 months or less. The longer the loan, the more interest you'll pay and the more likely you'll become "upside down" on that loan, driving a car that is worth less than you owe on it.
  4. Understand the big picture. Maybe I saved the best for last here, but it's critical to recognize that your ownership cost doesn't begin and end with your loan payment. It includes gas, insurance, maintenance and maybe even parking expenses. Determining what is affordable in this context can go a long way toward a good decision.

To be clear, I'm a car guy. If there's anybody who understands the temptation to break these rules, it's me. But please take my advice. Granted, you may not leave the lot with the vehicle of your dreams, but you won't be hit with a major dose of financial regret either. Happy shopping!

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