During the last round of stimulus checks, nearly 9 million Americans used the money to buy a car, and with an even bigger stimulus check fresh on many checking accounts, we can expect plenty of car purchases in the months to come.

The big question many people will ask themselves when considering swapping out their old car is whether to pay cash for their upgrade (or at least cover a large down payment) or just finance the car and keep the money for a rainy day should. At a time when auto loan interest rates are low, it is not entirely clear which financial choice is the right one.

If you are making this decision for yourself, here are the most important factors to consider.

Do you even need a car?

Start with an honest assessment of whether you even need a car. Does this car purchase address an actual need or desire?

Here are some questions to consider in your situation:

  • Do you currently have a reliable car that will get you to your destinations when needed? If so, think about it very carefully whether this is the right time to buy a replacement or whether there are other, better uses for your stimulus check.
  • Do you have access to alternative modes of transport that can take care of your duties? need? Is there a public transport system in your area? Are you close enough to work there on foot or by bike?
  • Is your current one need rarely for a car – less than once a month? In situations like this, is it cheaper to just rent a car when you need one?

Very often the impulse to buy a car is a reflex based on a Desire having a newer car, not an actual one need. Make sure it’s one need before investing that much money. If you don’t need to, use that money to do something more financially wealthy and buy a car when you need to.

Assess your financial situation

When you’ve decided that buying a car now is the right call to call, it is time to take a step back and look at your finances. Before deciding whether to buy a car with your stimulus money or to fully finance a car, you should take a close look at your overall financial situation. Here are four key financial health questions that can help you make the right buying decision.

Do you have high interest debt?

When you have high-interest debt, paying off that debt is a higher priority than paying down on a car loan. High yield debt includes anything that has an interest rate higher than the car loan you might get. Assuming you have decent credit, consider any debt above 4% APR as “high interest” here as this is very likely to be higher than the rate you would get on a car loan.

In particular, you should keep an eye on payday loan debt and credit card debt. If you have any Debt of any kind, the repayment of which should have a higher financial priority than a down payment for cars. Use your stimulus check for this debt. However, if you do intend to buy a car, finance the entire car with a much lower interest rate loan.

Do you have an emergency fund?

An emergency fund is a pool of money that is earmarked for personal emergencies such as unexpected job losses, illness, accidents, car problems, identity theft, natural disasters, or the like. A credit card is not enough as an emergency fund as it won’t work in many emergencies like identity theft or natural disasters, or when your balance is too high.

Money makes the world go round. If possible, have at least a few months of living expenses in a savings account.

If you don’t have an emergency fund, putting your entire stimulus check in a car is a mistake. You are in a situation where if something goes wrong in your life you cannot simply deal with it and you may have credit card debt or worse. An emergency fund has a higher priority than avoiding low-interest debt.

Do you have good credit?

One big assumption behind the first two questions is the idea that you have good credit. Without a good loan, you will not be able to get a low interest car loan easily.

Good credit simply means that you have a long history of paying your bills on time, underutilizing your credit cards, and avoiding identity theft. If that sounds like you, your credit is very likely in good shape.

If you are unsure of your credit balance, the easiest first step is to get your credit reports. You can get your credit reports once a year for free at any of the three major credit bureaus. Make sure they are correct and, if not, correct them by contacting the lenders.

Are you saving for retirement and other financial goals?

One final question to consider is whether you are mindful of your other financial goals, especially saving for retirement. Are you putting money aside for retirement through a company pension plan or through your own Roth IRA?

In the long run, the money you put into a healthy retirement plan offers a much better financial return than a down payment on a low-interest car loan. If you’re not saving for retirement at all, but you don’t have high-yield debt and an emergency fund, prioritizing retirement savings over a down payment for a low-interest car loan.

Buying a car with (or without) a stimulus check

After working through the above questions, you may have decided to put off buying a car to get your financial footing in place. This is a good choice. If you’ve checked the questions and still decided to buy, here are some tips to consider in order to get the best value from your car purchase.

First, if you don’t have a down payment (because it eliminated high-yield debt or took other smart financial steps), you can still secure a low interest rate on a used car loan if your credit is good. This is especially true if you are trading a car. If you can’t secure a low-interest loan on a car, the best thing to do is to buy a very cheap used car, pay it off quickly, and drive until you stabilize your balance.

Second, whether you’re paying in full, paying with a down payment, or financing everything, some car buying principles apply. In short, your best option is to focus on reliability by purchasing a used car of a newer model – one that has been made by a reliable manufacturer for the past several years. You can find out which automakers and models are reliable by stopping by your local library and reading the latest annual guide to buying a car in Consumer Reports.

After all, you buy your car with the intention of driving it until the cost of upcoming repairs exceeds the value of the car. Follow the maintenance schedule closely and use a trusted mechanic for this maintenance as it will dramatically extend the life and reliability of your car. This ensures that the car will be in great shape long after the full payout has been made.

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