Studies show that most American families own two cars. But taking on multiple auto loans is a big decision. How do you know if you’re ready? Use these tips as guides to help you decide if you’re prepared for a second (or third) vehicle.
Your credit score and debt to income ratio (DTI) will be the main sources lenders will review to determine if you’re trustworthy to lend to a second time. According to FICO, the largest factor in determining your score is your payment history. The timeliness with which you pay your bills makes up over a third of your overall score. If you’re paying your current auto loans (and any other loans) on time, you’re on your way to maintaining a good credit score.
Even more important than securing the loan from a lender is your comfort level with paying down another loan. Take time to look at your expenses as they are today and find out how another monthly payment might impact your financial journey. Take time to analyze your spending activity. Categorize your transactions into 4 buckets:
How much of your money is going into each bucket? Will another payment take away from your goals for those four areas? Or, do you have room to take on a new loan? Remember, the car payment isn’t the only piece of the puzzle. Leave room for gas costs, maintenance, insurance and any emergencies that may arise.
If you think you need two cars, but you’re not ready, don’t feel trapped. There are plenty of alternatives to consider. Public transportation, biking and carpooling can often carry you through until you’re ready to take on another loan. Many professionals are exploring options with telecommuting to save on costs (gas, parking fees and mileage all add up). Consider all of your options before making your decision to apply for another auto loan, and explore the car loan calculator to get a better feel for what payment may work for you.