7 Important Things to Remember When Buying a Car While in Debt

Jen SmithPersonal Finance17 Comments

buying a car while in debt

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You may find yourself in a place where buying a car while in debt is a necessity. Here are some important things to remember when making your decision.

In 2014 I had over $50,000 in student loan debt, a job that would never make me more than $50,000 in a year and a busted car.

I hadn’t planned on needing a new car for a few more years so my savings were not enough to pay cash and I was stressed from having to find rides and knowing how much this new car was going to cost me.

I cringe when I think about the process of buying my 2010 Toyota Corolla. The car runs fine but I know I overpaid because I was in crisis mode.

Ideally, you’ll be out of debt and can save up to pay cash for your next car, that’s what we’re planning and it’s what I think is best practice. The second best option is to start a sinking fund for your car or to stop paying anything over minimum payments on your debts and save up quickly to pay cash.

Before I go on and on about paying cash for cars I’ll leave you with this eye-opening video from “cash king” Dave Ramsey. Making the decision to go deeper into debt isn’t easy and shouldn’t be taken lightly. Do everything you can to avoid it.

Not everyone has the option to pay cash in a pinch. Life happens and crises are inevitable. So here are some of the things I wish I’d known about buying a car while in debt. They’ll keep you sane in the most insane of times.

1. If you Fail to Plan, Plan to Fail

You cannot enter this arena blindly; car sales people are good at making sure they get as much money out of you as possible. It’s not devious, their livelihoods depend on it.

Know the trade in value of your car, the extras you need, want, and can live without, research the cars you want and know the ones you want to look at. Know your budget but don’t disclose it, keeping your budget under wraps gives you the upper hand in negotiating. I miraculously spent $4,000 over my budget when I disclosed mine.

Learn these 7 Tactics and you’ll be way better prepared to interact with sales people than I was.

The same goes with private sellers, know more about the car than they do and it’s unlikely you’ll be scammed.

2. Know Where to Get a Car Loan

The Simple Dollar keeps an updated list of best auto loans online, at big banks and for those with bad credit. Local credit unions are notorious for low rates and I say the more local the better. Having a relationship with the place that holds your money means more options and possibly lower rates.

Longer loans have lower monthly payments but higher interest rates. Lengthen out the term only as far as makes it affordable to get the lowest rate, three years is ideal.

Yes, that probably means you’re getting an older car, cheaper car, but hey, you’re in debt. When you’re out of debt it’ll be easier to get a better one.

3. Leasing vs. Buying a Car

The lower monthly payments of leasing a car look really good when you have high debt payments. And it might be enticing to think you can drive a car you can’t afford for a few years.

But when it comes to the pros and cons of leasing vs buying a car, buying wins in the long run. Interest rates, finance charges, and restrictions are all higher in a lease and when the lease ends you have no equity in the car.

4. Buying a New Car vs Buying Used

The radio is dripping in car dealership ads soaking us with all their deals on new cars. And the incentives to buying a new car are definitely there: lower interest rates, peace of mind in their integrity, and all that free stuff in the commercials.

But the real difference in choosing new vs used is in depreciation. Over a three-year period, it’ll cost you an extra $10,000 to drive a new car vs a used one. And cars made in the last 10 years haven’t changed much, the real difference in reliability come down to make, model, and year, not age.

You can research on sites like Kelly Blue Book or Consumer Reports to estimate a vehicle’s cost to own.

Don’t let old adages about used cars trick you into wasting money on a new car right now. When you’re out of debt and paying cash for cars you can afford that extra money spent to have something new, but not while you’re in debt.

5. Questions to Ask When Buying a Used Car

Buying a used car takes a little more work than leasing or buying new but it’s time well spent for the money you’ll save. Don’t be nervous about asking too many questions, it gives you the upper hand and as they say, “the squeaky wheel gets the oil.”

Former car salesman and Shark Tank alum, Nate Holzapfel has a list of 21 questions you should ask when buying a car. It’s exhaustive, a little redundant and will make you look like you are not to be messed with.

6. Buying a Car from a Private Seller

People’s biggest fear when buying from a private seller is the quality of the car. But as WikiHow points out, negotiating with an inexperienced seller and no dealership fees will save you more than few mechanical repairs will cost you.

There are a few tips to consider to give you peace of mind when buying from a private seller. You can apply for financing through the bank for the lump sum to pay the seller. You’re going to want to go with check in hand so plan accordingly. I would get a check for less than you want to spend and pay the difference in cash.

Of course, you’re going to take it for a test drive and visually inspect it but also get a pre-purchase inspection done by a mechanic. It’s usually around $100. And if the seller can’t provide a detailed maintenance history and Carfax you can negotiate the cost out of the purchase price.

And make sure you have all the paperwork properly filled out. The DMV is super particular about the title so check your local office for state requirements so you don’t have to waste time getting a signature or something.

7. Other Ways to Save on Used Cars

If you’re looking for a car to get you around for a few years until you can afford a nice one, consider buying a car with a rebuilt title or a former rental car. We have owned a 2003 Toyota Corolla with a rebuilt title for over a year and haven’t had any problems with it. These cars aren’t ideal long term options but they’ll save you a lot of money and are typically reliable.

What kind of car do you drive and what car motivates you to get out of debt so you can cruise around town in it? (Mine is a red 2015 Mazda CX-5!)

buying a car in debt

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17 Comments on “7 Important Things to Remember When Buying a Car While in Debt”

  1. I always bought used from a private seller and it saved me a lot of money. Just take someone who knows cars with you and all set. These were great tips for someone who NEEDS to buy a car even if they are in debt. And love Dave Ramsey 🙂

  2. We just upgraded our old car to a new used car (new to us). We had been saving for a few years so with the private sale of the old car plus our savings we were able to pay cash for the new one (new to us).

    Paying cash gave us a ton of leverage because 100% of the negotiation was about price and not financing or trade-ins.

    Not being in a rush also gave us a ton of leverage. We went to a few places to look at cars. We negotiated hard on that first visit but still walked away. Almost every place called us back within a few days to make a better offer.

    1. Those are great points. It’s always better to plan and buy a car before you need one because that’s gonna put you in the right state to get the best deal. And selling privately is a great way to get more for your old car! Thanks Owen!

  3. Good post. I’m 40-something and I just bought my first car from a dealership. Previously, I always bought a used car through a friend or craigslist, but that was hit or miss. As I get older, I like the security and protections of buying from a dealer.

    1. It’s unadvisable but sometimes it’s necessary. I’m just hoping to help people who are in the position I was have a little more wisdom than I did.

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  5. Great tips! Using a credit union has really helped me save money. Knowing your options is always important. Making sure the dealer knows you have looked around and know what other dealers are offering can help a lot also.

  6. We bought a 2017 Pathfinder last week, after calling dealerships and getting them to bid on the exact model we ended up paying ~$500 more than the used 2016 models that were posted.

    I’ve found paying in cash and calling dealerships help. Once they get you in the door they have more power, but if they think you’re just calling a bunch of dealers they know they have to sharpen their pencil.

    Great post!
    Buck

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