If you’ve saved up a significant sum of cash, you may wonder whether it’s a good idea to buy a new car or a new house. Both are major purchases that most people buy at some point in their lives, and both are inherently valuable—both in terms of the amount of money they cost and in terms of the practical function they serve.
The question is, which purchase should you strive to make first? Should you put your money toward a car, securing transportation and avoiding a car loan, or put the money toward the down payment of a home, so you can stop paying rent?
First, you’ll want to consider the bottom-line value of each asset in terms of its functionality in your daily life. Obviously, both a car and a home could be valuable. You’ll always need some place to stay, but you can easily rent a home or an apartment, which serves as a perfectly suitable substitute for owning a home. In this way, owning a home doesn’t necessarily provide a functional advantage over renting a place (though there are plenty of other benefits to enjoy).
A car’s practical value is slightly higher, compared to the alternative of not having a car. This is especially true if you live in an area with sparse or unreliable public transportation.
Loans and Personal Credit
Next, you’ll need to think about the nature of each loan, as well as your own personal credit—and whether you can qualify for each loan. Generally speaking, if you have a good or excellent credit score and a consistent existing income, you shouldn’t have trouble qualifying for a loan (so long as you can afford the payments).
For homes, the conditions are slightly stricter, since homes are more valuable and there are more risks involved. Before you buy a home, you’ll need to get pre-approved for a loan. Whether or not you’re approved depends on many factors, including your income, your target price range, how much you’ve saved for a down payment, your credit score, and how much you have in other assets. If you fail to meet the proper conditions for a loan, buying a home may not be an option.
If you find yourself unable to qualify for a home loan due to low credit or no credit, getting a car may be a better idea. Car loans usually have fewer restrictions, but more importantly, making consistently timely payments on your car loan can boost your credit score, increasing your chances of qualifying for a home loan.
How much cash do you have available? This can push your decision in either direction. If you have $20,000 in cash, for example, you should have plenty to make a down payment on a house—and increase your chances of qualifying for a home loan. However, you’ll also have enough money to buy an inexpensive or used vehicle outright, forgoing the process of getting a car loan. You might even have some left over to put toward a house in the near future.
If you don’t have much cash at all, you may not be able to submit the down payment for a house. If that’s the case, buying a car may be the better option. The only alternative is to bide your time and save up more money; depending on your goals, this may be advisable.
Equity and Depreciation
One of the most important considerations here is the long-term value of a car, compared to a house. When you buy a house and make regular mortgage payments, you’ll be building home equity. Your ownership in the home will increase, so when you sell the home, you’ll enjoy a bigger payout. On top of that, home values tend to increase over time, giving you a significant return on investment.
Cars, by contrast, depreciate significantly over time. This is especially true of new vehicles. While you will be building equity in the vehicle by making regular payments to your car (or you’ll own it completely if you buy it outright), its value will almost certainly not increase. For this reason, buying a home is typically a more favorable financial decision.
The Bottom Line
While there are some general financial principles that everyone can follow, no two people will ever be in exactly the same position. The amount of cash you have saved, your current credit score, your short-term goals, your long-term goals, and your logistical needs will all play into your final purchasing decision. Depending on your city, you may need a car before you need a house for functional purposes. Otherwise, a home is usually the better investment.