Buying a Vehicle? Consider Paying Off Debt First

Buying a Vehicle? Consider Paying Off Debt First

April 17, 2024    Budgeting Advice

Have you been thinking about buying a car, truck or SUV? While the thought is exciting, it’s also important to consider if you should pay off your debts before taking the big leap of becoming a vehicle owner.

If you’re wondering where to start with paying off debt, you’re not alone. It can be tough to figure out which accounts to pay off first when trying to get out of the red. The thing to remember is that all debt is not created equal. It’s important to take a look at the kind of debt you’re carrying and create a strategy that will work best for you.

But first, let’s explore why it could be beneficial to pay off your debt before buying a vehicle.


Paying off your debts before purchasing a car is always going to be a wise financial move. Here are a few of the main reasons why:

You’ll save interest. By paying off existing debts, you reduce the overall interest you pay. Car loans accrue interest over the loan term, so paying off other debts first can help you save money in the long run.

Your credit will improve. Consistently making on-time payments and paying down debts will contribute positively to your credit rating. A good credit score means better financing options and rates when it comes time to buy a car.

Budgeting will be easier. Eliminating other debts will free up your monthly budget. With fewer financial obligations, you’ll have more disposable income to allocate toward car payments or other future goals.


If paying off your debt before buying a vehicle feels like the best financial decision for you, a good place to start is to take a look at what types you currently have – and whether they’re considered ‘good’ or ‘bad’ debts.

‘Good debt’ often comes in the form of student loans, mortgages or car loans that require you to make the same payment amount each month for the duration of your loan. The reason this debt is considered good is because it’s less risky than credit cards or lines of credit. They also have lower interest rates and can help improve your credit score by proving you are a responsible borrower who pays back what you’ve been loaned.

In other words, good types of debt bring value to your financial situation and future. Bad debt, like high-interest credit cards, lose value quickly and can put you in sticky situations with your hard-earned money. That’s why it’s recommended to tackle any bad debts first.


Here are the three types of bad debt you should pay off in order of importance:

  • Debts with the highest interest
  • Accounts with high credit utilization
  • Accounts with small balances

High-Interest Debts

It’s important to prioritize loans or credit cards with high-interest rates because they cost you more to maintain and make it hard to get out in front of your debt. With interest rates between 10% and 30%, credit cards are the worst offenders when it comes to expensive debt. That’s why they should be paid down first.

Debt Payment Strategy: Speed up payments on high-interest loans by opting for bi-weekly payments. And always make the minimum monthly payments on your credit card balance – otherwise, you’ll end up paying more in interest.

Accounts With High Credit Utilization

Paying off accounts with the biggest balance can lower the amount of credit you’re using and help improve your credit score. Your credit score utilization should be less than 30%, which means if you have a credit limit of $10,000 you should never carry a balance higher than $3,000.

Keep in mind that this only rings true with revolving credit accounts carrying a high balance — installment credit, like a mortgage, shouldn’t be your top priority because of the extended time frame you’re given to pay it off.

Debt Payment Strategy: Pick out which debts are quickly approaching their borrowing limit and work on paying those down first.

Accounts With Small Balances

How good would it feel if you had just one less debt to worry about? Paying off your smallest loan might not seem like an accomplishment, but you’d be surprised what a difference it can make. Depending on on how small your loan is, getting that balance down to $0 is something you can do relatively quickly and gives you a much-needed motivation boost. They call this the “snowball method” – knowing you’ve got one less thing on your plate can make it easier to start picking away at your larger debts.

Debt Payment Strategy: Pick your lowest debt and throw a little extra money at it each month and whenever you have extra cash.


Another option when it comes to dealing with debt is simply moving your money around. Many banks and lenders offer consolidation loans, which allow you to pull all of your outstanding debts into one account under one interest rate. This can make it easier to manage debt repayment because you only have to make one payment each month. If this seems like a good option, talk to your bank or financial institution.


Whether you’re $5,000 or $50,000 in debt, the most important part of successfully paying off any loaned money is coming up with a repayment strategy that works for you – and sticking to it. Setting goals, tracking your progress and keeping yourself accountable are all good ways to keep moving forward.

Another thing to keep in mind is that buying a vehicle is a huge life decision. The last thing you want is to purchase a car before you’re financially ready and end up in a worse situation when it comes to debt. Having the peace of mind that you’ll be able to manage the extra expenses that come along with purchasing a vehicle is priceless.


Our credit experts at Birchwood Credit can help you improve your score, make sure you’re not exceeding an advisable level of utilization, or tackle any other credit questions you might have before buying a vehicle.

Take a few minutes to fill out our easy online application form to get started today!

Rebecca Lake
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