Upon initial consideration, buying a car seems like a smart investment. It’s a great way to build credit as a young adult and when well cared for, and your car is a reliable source of transportation for work and leisure for years to come.

In fact, the financial ramifications of buying a car are much greater than this simple analysis, and under certain circumstances you may find that buying a car is actually damaging to your financial future. Whether you’ve accidentally sunk your money into a lemon or you’re a danger-prone driver, some cars can leave your credit looking rather dismal.

Managing Your Debt

As noted, a car can be a good way to build credit, because when it comes to debt, not all debt is bad. Rather, small amounts of credit with low interest rates, that you can reliably pay off, can help you build a positive credit history that will come in handy if you’re looking to buy a house down the line. If you took out your car loan while in financial straits, however, you may find yourself with a sky high interest rate and thousands more in debt that you can pay – that’s bad debt.

When you leave your car debt unattended for too long, you’re likely to see your credit score decline. This can make it harder for you to get new credit cards, decrease your interest rates on existing cards, and can prevent you from taking out other loans.

Check your credit score regularly and be proactive about maintaining an upward trend.

Insurance Troubles

How much car insurance costs depends on a few different factors – how much your car is worth, how good your driving record is, the quality of your credit, and more.

However, it’s very dangerous to go without insurance, just because it seems like a big expense. If you’re in an accident while driving without insurance, and you’re at fault, you’ll be required to get an SR22 policy in order to keep driving. These policies are among the most expensive on the market and you typically need to carry them for a few years after such an incident.

You may not know that if your credit has taken a hit from vehicle debt, unpaid student loans, or other financial shortfalls, that you could find yourself paying more for insurance. Even though there isn’t a direct link between your insurance needs and your credit score, insurance companies view those with significant debt as poor prospects for their policies.

A Run of Repairs

Finally, when buying a car, you need to be confident that you can afford the payments, insurance, gas, and any repairs your car may need. Typically you’ll get a fair period of time before you’ll need to take your car to the shop, but how long depends on how much you drive, what kind of roads you take, how cautious you are, and whether you’ve purchased a used or new car.

Failing to thoroughly look into a new car can result in a purchase you regret – and that will land you at the mechanic’s over and over again. That can surely do some damage to your finances.

Buying a car shouldn’t be approached lightly, as there are significant financial ramifications to the process, so do your homework and fully assess your credit and savings before you jump into the market – and don’t be afraid to ask for help from car savvy friends.

Under the best circumstances, a car can improve your earning power, giving you access to more employment opportunities, and helping you build credit, but even a small misstep can drain your funds if you aren’t ready to invest.

Categories: Insurance