Friday, October 23, 2009

Recent Grads: Wait on Buying that New Car

Using a Car Loan to Build Credit Isn't Such a Good Idea

An auto loan can help you to build good credit IF you make the payments on time and in full for the entire length of the loan. Otherwise, you will only hurt your score. In addition, you should keep in mind that the loan could potentially impact your credit negatively because it is a large amount of outstanding debt. You would likely not see the full positive repercussions of taking out the loan until it's fully paid back.

There are plenty of other ways to build credit that don't cost you anything, like being added as an authorized user on your parents' credit cards. If you're tempted to finance a car purchase solely for the purpose of establishing good credit, don't bother.

Why You Should Stick With a Used Car for Now

There are a number of reasons why buying a used car with cash makes more financial sense than taking out a loan on a new one:
  • Focus on the debt you have: You're likely graduating with some loans or credit card debt. Instead of adding to the burden, use the money you earn to pay these debts down so you can start with a clean slate again.
  • Spend the money elsewhere: Why make payments of several hundred dollars every month when you don't have to? Even if you don't owe any creditors, it's nice to have the extra cash to spend on things you really need until your pay increases.
  • You might not have a job: Don't assume that just because you have a degree, you're going to land your dream job on day one. It might take you awhile to find it--possibly a long while. Don't commit to payments you don't yet know you can make.
This isn't to say you shouldn't ever take out an auto loan; quite the opposite, in fact. Car financing can help you spread the cost of a large purchase out over a longer period of time and make it easier to fit into your budget. However, as a new grad, your finances are likely to be a bit shaky at first, so don't complicate matters by taking on a loan you don't need.

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