If your car has a lot of miles on it, you may be thinking about buying a new one. While new cars can be safer than ones that have been on the road for several years, they’re also expensive. According to Kelley Blue Book, the average price for a new car was over $48,000 as of this summer. With prices like that, you want to make sure your finances are in a good place to purchase a new car.
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Wondering whether a new car makes sense for you? Here are some of the signs that you are ready to buy a new car in the coming year.
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You Save Money Every Month
You must regularly earn more than you spend each month before considering a new car. Some people can buy a car with cash, but most people will have to take out a loan. Even if you buy the car with cash, you’ll also have to pay insurance each month.
If you’re barely covering monthly living costs, you may want to wait on the new car.
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You Have a Sufficient Emergency Fund
In addition to regularly saving money, you should have money set aside for an emergency fund. Most experts agree that you should have at least six months’ worth of expenses saved up in an emergency fund. People set up emergency funds in case they lose their jobs and need extra cash to cover their living expenses.
Car loan payments will increase your monthly expenses, which means you’ll need more money in your emergency savings account to cover six months’ worth of expenses.
You Know How Much You Can Afford
Consumers who are looking at the car market should know how much they can afford before committing to a vehicle. People who want to buy a car outright should assess their maximum budget for a purchase.
Borrowers have a different approach. They should prioritize their loan payments and ensure they won’t take up too much of their monthly budget. Car buyers can extend the duration of their loan to reduce their monthly payments, but that approach will also increase lifetime interest payments.
Your Credit Score Is Good
A good FICO score is more valuable for people who are taking out an auto loan. Lenders and dealerships will look at your credit score and other factors to determine your annual percentage rate (APR). A good credit score ranges from 670 to 739, but elevating your score will result in lower rates.
An extra percentage point can have a significant impact on monthly payments. For instance, a $45,000 loan with a five-year term and a 10% APR will have a $956.12 monthly payment. The same loan with an 11% APR will have a higher $978.41 monthly payment. Building your credit score with on-time payments, low credit utilization and other factors will give you more options when you’re looking to buy a car.
You Have Addressed Important Financial Milestones
While it can be exciting to buy a new car, make sure it isn’t impeding on more important milestones. For instance, it could be better to save up for a down payment on a home and take out a mortgage. If you aspire to be a homeowner, it could be good to prioritize that goal over buying a new car.
In a situation like that, the new car could wait. You can also opt for a used car to save money.
Each person must assess their financial situation before deciding whether a new car is right for them. However, it’s better to think about buying a new car when you have everything in order. It’s good to set long-term financial goals and see how buying a new car can help or impede those efforts.
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This article originally appeared on GOBankingRates.com: 5 Signs You Are Financially Ready To Buy a New Car in 2025
