I recently answered a question on Quora from a 20-year-old who wanted to know if it was a good idea to get a $13,000 loan to purchase a car. She had no debt, no car and earned $1,500 per month. I really commended her on the fact that she sought counsel before making this purchase.
I think there is a certain enchantment that occurs when young adults are confronted with their first car buying decision. I don’t know if it is the new car smell and the feel of the steering wheel under nervous sweaty fingers that cause them to fall into this financial trap time and time again. Whatever it is, they need a reality check!
For the 20 somethings, I will say it again …
Getting a loan to purchase your FIRST car is a bad idea.
You will be stuck with a car payment for an average of three years. A lot can happen during this time. Believe me, I am speaking from experience. You can decide to go back to school. You can lose your job. There is a whole myriad of things that can occur which can impact your ability to service this debt.
Another factor that most young people do not consider it the cost of car insurance. If you are a new driver, you are already high-risk and if you have a newer car, it will cost even more to insure it. So before you sign on the dotted line for a loan, make a few enquiries. In some instances, you will find that the car insurance might even cost more than your monthly car payment.
So what are your options?
If you absolutely must get a car. Save enough money to buy the car outright. It might mean an older car with some mileage already on it, but it is a better option. If you are able to keep the car for about two years it will help you establish your auto insurance history which will improve your rates when you eventually upgrade to a newer and better vehicle.
Get into the habit of putting aside 10-20% of your income into short-term savings. This will help you cultivate the habit of saving and build an emergency fund to handle life’s financial hiccups.
A final note to remember – You do not have to impress the crowd. Follow your own rhythm and create your own financial path.
To your success!