One common financial mistake people make is to trade-in there current car, and car loan for a new one. The dealer often says that they will pay off the existing loan for them, and that they will come out with a better car, and possibly a better interest rate. There are several reasons why this is not a good idea.
1) The dealer is not going to pay off the loan for you, they just role into the current loan that you are taking out. So you end up borrowing more money than what your car is actually worth. This called being upside down on a loan. If something were to happen to you, you could sell the car, and still owe several thousand dollars to the bank.
2) Buying a brand new car is the quickest way to say good-bye to a couple thousand dollars. If you are well off enough to do that without worrying, then you can buy a brand new car. Otherwise the wisest investment is to buy a used car about three years old. You can find cars that age that come with warranties, and you will not be losing the same amount of money on your investment.
3) If you can you should pay cash for your car. However, it may be difficult to do so, and a car is often a necessity. When purchasing a car make sure that you are balancing the necessity of a good reliable vehicle against your wants of a flashy or bigger car than you truly need or can afford.
4) The best rule of thumb for a car purchase is if you can pay it off in three years (afford the amount the monthly payments would be on a three year loan) then you can afford the car. If you can’t you shouldn’t purchase the car.
When you decide that you need to purchase a new car, consider buying a used one. You should always take the car to a mechanic and have it checked before you purchase it. The mechanic can tell you about any problems that the car may have, and the fee is usually pretty reasonable.