Pay cash for an older car or finance a slightly newer car

by Cheryl
(Columbus, Ohio)

Question: I'm looking to get a used car. I'll be making about $3000 monthly. I just graduated from college and this will be my first full time job. I'm trying to figure out which would be financially smarter in the long run: 1) Buy a nice reliable car for say $5000, 2) Finance a car (specifically a 07 or 08 Honda Accord) for 60 months or 3) Somewhere in the middle of 1 and 2.

I plan to put at least $3,000 if I finance and go through up2drive.com or a credit union for a loan.

Thanks!!!




Answer: Hi Cheryl,

First off, I'd like to say that you are already thinking along the right lines. The fact that your question didn't start with "Should I get the brand new BMW 7 series or..." means that you will probably have a very bright credit future.

Up2Drive

First I'd like to talk about what your best options are going to be with regards to financing. I don't think that you'd be a candidate for up2drive.com only due to the fact that your credit is more than likely going to be too limited and your job time will obviously be limited.

Credit Union

A credit union on the other will probably be an excellent option for you. Your approval with a credit union will depend on what if any credit that you currently have, but could be as good as 6-9% for the 60 months that you are considering.

Again, depending on your credit, you may only be able to get approved for $8,000 to $12,000 (without a cosigner) through a credit union.

Honda Finance

Another option for you would be to buy your Accord from a Honda dealer and Honda Finance will more than likely give you job credit (assuming you are going into the same field as your degree) for your time in school. They are even friendlier if you buy a certified pre-owned Honda.

Some Things to Consider

I'm sort of torn on the answer to give you here (although I'm leaning towards somewhere between 1 and 2), so instead of specifically saying to do one or the other I'll give you some things to keep in mind that will hopefully make your decision easier.

1) Buy something that you'll be happy with for at least the next 2 years, preferably 3 years. This will give you a good amount of time to build up some credit. It will also help you to get to a point in your loan where negative equity won't be as big a factor when you go to trade.

2) If you will be making $3,000 a month, then look to take on a payment below 10% of your income. A payment under $300 should be easily manageable for you and it won't cause you to live around your payments.

3) I would hesitate to tell you to buy a car for cash and would say that financing would be the way to go, again, to build your credit. If you do buy the $5,000 car, then I'd probably put as little down as possible, let's say $1000, and after the loan is funded put the other $2,000 towards the principal.

This will show as a $4000 loan on your credit, which will build credit faster than a $2000 loan. The second car loan that you get, sometime in the future, will more than likely only be approved for 1 1/2 to 2 times what this car loan is for.

Summary

To sum this up, don't get strapped to a car. Keep your payments easy and you'll have rock solid credit before you know it. This is a chance to make or break your credit! It sounds like you are on the right track...

Please don't hesitate to ask any further questions.

Hope this helped,
Justin