Car Payments: They s-u-c-k. Nobody wants one.
But what happens when you’re driving a car that’s become unreliable and you know it’s a matter of time before you’re stranded on the side of the road? Yet you’re not in the best financial position to buy another car yet?
Here's a checklist of sorts that will guide you through the process of buying a good used car.
Dave Ramsey says you should pay cash for a car and that you shouldn't buy one until you can do that. But that advice isn't realistic for everyone!
If you can pay cash for your next car, congratulations! This article isn't for you - although there's some great info below that you could share with someone who does need it.
Jump to the section you want to read first if you don't have time to read the whole article:
If you haven’t even started saving for your next car or you're working on it but don’t have enough money saved up yet, and you’re holding your breath every time you crank your car, praying it turns over, this article is for you.
Follow this checklist for buying a used car to start proactively working towards a plan for when you have to buy another car:
Before you even think about shopping for a car:
The very first thing I recommend, if you don’t already have it, is a AAA membership. Last I checked, it’s around $75 for two family members.
This company has rescued my daughter and me countless times when we’ve had flat tires on the interstate, a dead battery, or have locked our keys in the car.
AAA.com is the national website. It will ask for your zip code so it can redirect you to your local AAA office. The yearly membership fee is affordable considering the service they provide.
AAA is my first line of defense for emergency car problems. Sure, they won’t buy you a new car, but they will get you out of a bind in the heat of the moment. They changed a tire for me just last week.
If you don’t want to buy that protection, please-oh-please have a person in mind that you can call no matter what time of the day or night - someone who will stop what they’re doing and come to your rescue if your car has died and you need a ride to work or back home.
EMERGENCY PLANS
Let’s talk about other emergency plans you need to have in your back pocket if you’re driving a clunker and don’t know if it’s going to crank tomorrow. These are all of my back-up plans for car trouble:
I drive a 2006 Camry with 275,000 miles on it. I could buy a new car now, but I’m choosing to get the most use out of this one until I just absolutely have to buy another car. In the meantime, I’m enjoying using the money to travel that I would be spending on a car payment if I traded ole “Bessie” in for a new car sooner than I need to. I’m continuing to save also.
I’m not afraid of debt and I don’t like the financial gurus who try to put the fear of the Money God into us by shaming people who have debt. But that’s a story for another day.
"Bessie" the 2006 275k mi Camry recently made a 3,600 mile round-trip from Alabama to Arizona!
When traveling on an interstate - Know the local highway patrol roadside emergency number (this is not for local roads). It’s often a 2-digit number followed by a pound sign. (#) Google it to find your local roadside emergency number. 911 is not the number to call for car breakdowns.
If traveling by interstate, pay attention to the exits and mileage marker numbers. If you have to call for help, they need to know exactly where you are.
If stranded, be prepared to use Uber or Lyft to get a ride to where you need to go. This requires installing their app on your phone and connecting your bank account or a credit card to the app to pay for the ride.
Put the word out with friends and family that you may need a ride to work or school and see who’s willing to help out in the event your car dies. Have a plan, just in case.
TO BUY NOW OR NOT TO BUY NOW..... THAT IS THE QUESTION
Now that you have an emergency plan, let’s talk about whether you should keep gambling on your old car making it another day, week, or month.
Here’s a rule of thumb that was given to me by an old friend who worked on cars. If a repair to the car can be made that will extend the life of the car, use this easy math trick:
Let’s say a repair of $800 would keep the car running longer. If the mechanic predicts that you can get at least another 8 months of driving out of the car by making the $800 repair, that’s a $100 per month investment.
If you ditched the car in favor of replacing it, can you buy a car with a car payment of $100 per month? If not, spend the $800, repair the car, and drive it for longer, hopefully another 8 months or more.
However, if the repair is major, such as a transmission, and the car is very old and has very high mileage, it’s usually better to go ahead and start shopping for a replacement.
I’ve used this rule of thumb over the years for my 2006 Camry, and every time I’ve been faced with paying for a repair, I’ve asked the mechanic if, by making the repair, they think the car will last another four months, ten months, whatever the repair cost is divided by $100. And I’ve not regretted it.
When I think back on the last repair I had to make of around $900 two years ago, I’m thankful I didn’t choose to replace the paid-for car with a $300+ per month car payment. I spent $900 on the repair and drove the car for two more years vs replacing it and spending $300 every month for those next 24 months ($7,200). Make sense?
THE MONEY
Now that we’ve gotten the emergency plan out of the way, let’s talk money.
If you’re driving an unreliable car and don’t have any money set aside for a down payment on your next car, much less enough cash to buy it outright, here’s what to keep in mind about the decision you’ll have to make sooner than later:
Even if you need a car immediately, please don’t rush out and buy one without working through all of your options - especially about financing. If you don’t need to buy a car now, NOW is the time to start doing this research in your spare time. Be prepared.
Some experts say to start your research for a car or a home by figuring out exactly how much you can afford. STOP!
There’s a better way! Start with figuring out just how little you can pay to solve your problem: the need for a reliable car.
Start by solving the problem of getting a dependable car - not your dream car, not a car that will impress your neighbors and friends. What will a reliable car cost and what’s the lowest price you can find?
Next, browse used cars online at a car dealership in your area that has a good reputation and that sells Certified Pre-Owned Cars. Here’s a great example of a dealership I’ve used, just to give you an idea of what to look for in a dealership you can trust. This site will also give you a quick way to comparison-shop prices against the dealership in your area. https://www.hoovertoyota.com/used-vehicles/
KNOW YOUR CREDIT SCORE
Before you start checking to see if you can get a loan, check your credit score. You can do that free on these sites, but there are many other sites to check your score also. I just happen to like these:
Once you get an idea of just how little you can spend to get a decent, dependable car, start shopping loans next:
Ask the dealership if they have any special deals on interest rates.
Call your bank or check their website to see what rates they offer on used car loans.
Check with a local credit union. Sometimes they have low interest rates on car loans.
Take control of choosing the best option and don’t let the dealership dictate what you need to do for financing.
Keep in mind:
The older the car is, the higher the interest rate typically is. That’s why it’s important to shop around for both the car and the loan provider.
A longer loan term (number of years) isn’t always the best deal - a shorter term can come with a lower interest rate.
When you’ve determined the lowest interest rate you can find, crunch the numbers to see what your payment will be. Use an online calculator to do this. Here’s one of many free ones available: https://money.usnews.com/loans/loan-calculator
Using a total cost of $15,000 for the car, with an interest rate of 6%, with a loan term of five years, the payment would be $290. Yikes, that seems high to me. Are you able to make a $290 payment for the next 60 months? If not, keep shopping.
Another example:
Let’s say you have $1,000 saved for a down payment, and you were able to find a good used car for $14,000, and a lender who will finance it for five years at 7% interest. The payment calculator shows that will be a $257 per month payment.
Get a notebook and write out these payment examples by hand and run a few more scenarios using the online calculator.
This exercise puts you in power. You will make a far better decision about your financial future if you put in a little time up front before you head out to test drive a car.
One more money exercise:
But before you commit to buying a car at the payment you think you can afford, take out a notebook and write down your monthly expenses and compare it to your take home pay to know for sure that the new payment won’t put you in a bind.
If you need a template to help with determining this, there is a free one in the Resource Library on my website: valuesbasedfinances.com.
Here’s a good rule of thumb to use:
Car expenses should be no more than 15% of your total take-home pay. Example:
If you bring home $2,000 per month, a car payment should be no more than $300 according to national averages.
THE CAR
Knowing your ideal sales price and the approximate monthly payment will prevent you from test driving a car you ultimately can’t afford. Go into the dealership with a maximum sales price and don’t let them talk you into test driving a car that costs more. You’re in control!
When you’ve found a car that you’re interested in and one that fits your budget, take it for a test drive. Trust your intuition. If something feels off, keep shopping. If you love the car, but the road noise is too loud, or the seats are super uncomfortable, keep shopping.
If you love everything about it, ask for a vehicle history report. This can be looked up using the car’s VIN (vehicle identification number). The report will show if the car has been wrecked and how many people have owned it.
Make sure you will receive a clean title to the car when you purchase it. A good dealership will help you with all of these steps.
Buying from an individual will require you to do these steps on your own. I don’t recommend buying from individuals, but if you do, please use the internet to look up the car’s history.
Another thing I always check is the estimated gas mileage. Shop for a car that gets decent to great gas mileage - over 25 mpg. Ideally over 30.
If you can afford a hybrid, you'll get fantastic gas mileage, but the sales price of the car will likely be higher.
Maintenance:
Keep in mind that the more expensive the car was originally, the higher the maintenance costs will be as it gets older. I’ve seen Volvos, Audis, BMWs and the likes on used car lots for seemingly low prices, but the cost to maintain these models is considerably higher than maintaining mid-tier cars like Toyotas and Hondas.
Insurance:
The last major consideration is insurance. Call your car insurance agent and get them to run some estimates of how much the insurance will be on the car you may buy, and take that into consideration. You can shop around for insurance in the same way you shopped around for the best price on a car.
And a final note……please don’t ever use the title loan companies to get cash in exchange for your car title. They are predatory lenders looking to make a profit from high interest rates charged to people who can least afford it.
If you have a question that I didn’t cover, send me an email!
Need help getting started or with motivation? Book a book a free 30 minute phone call with Karla, click here.
Share this checklist for buying a new car with a friend!
Additional Resources:
How to Negotiate Car Prices:
My TikTok account has a special playlist on credit card debt: https://www.tiktok.com/@valuesbasedfinances
This article does not include any affiliate links and AI was not used.
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