I will be honest, when asked to write an article on car affordability, I needed to pause and reflect. The thought of financing a car had not crossed my mind in over a decade. Having purchased my car in 2007, with the then-typical 60 month loan, I have been car-payment-free for a few years. After taking a look at the recent car payment and loan statistics, the thought of having a new car payment is alarming. According to a recent study by Experian, the average monthly car payment has risen to $503. If that wasn’t bad enough, the average length of a car loan now stands at 68 months. Nearly one-third of new car purchases in 2016 included loans that stretched from 73 to 84 months. While I am no financial genius, common sense tells me that if you have to finance your new car purchase over 73 to 84 months, you can’t afford the car.
So how DO you determine how much you should spend on a car per month and how much car can you afford? The answer is as different as the person you ask or the financial book you read. For this article I referred to my favorite financial gurus , the people that have “been there, done that” and have the financial scars to prove it.
Dave Ramsey is a nationally-syndicated radio talk show host and author of the New York Times bestselling books, Financial Peace Revisited and The Total Money Makeover. Dave preaches being debt free and not taking on any new debt for any reason whatsoever. The reality is we are not all in a place to be debt-free. If we need to finance a car, well, we need to finance a car. Dave’s advice for car affordability is that all of your vehicles cars, trucks, boats, Sea-Doo’s, motorcycles, and anything else like this—should not total more than half your annual income. Example: If you make $50,000 a year, the total value for your cars, scooters ATV’s and other mechanized vehicles should not total more than $25,000.
Suze Orman is the Queen of Money. The author of more than 11 books, she is my “go-to-girl” for financial advice. She gets it from a woman’s perspective. She understands all points of a woman’s life financially from the young, single and broke, to the retired, elderly widow and every step in between. Orman has 3 main points about car buying and affordability:
- Only shop for cars that you can pay off in 3-years (36 moths) or less. If your projected payment is $1000 and you can’t see yourself paying that much monthly, then the car is too expensive. Orman’s advice is that a car is the worst investment, so why pay more than you need to on something that will lose value?
- Never lease a car. Lease terms are usually 24 to 36 months. Buying a car with Orman’s advice, you end up owning the car at the end of 36 months as opposed to returning the car and having to start the process over again. It is a matter of financial security.
- Keep you car for 10 to 15 years. Given the dependability of cars these days, that could mean you could keep driving the car for five, seven or even more years without having a loan payment. That gives you years when you can be saving more for other important goals—such as retirement, rather than continuing to throw money at your depreciating car.
Richard, or more affectionately called “Rico”, is my dear husband, a playful combination of Warren Buffet and Kid Rock all rolled into one. When I asked for his input on this article, I predicted correctly he would use the word “Margins.” “Margins” is our family buzzword for fun money, comfort money, emergency money- important to have and important to protect. Getting wrangled into a car payment that is the maximum of what you qualify for often doesn’t allow for “Margins.” According to Rico, a monthly car payment should not be more than 8% of your monthly take home pay. Example: if you bring home $4,000 a month, after taxes, health insurance premiums, 401k, all the stuff that comes out of your paycheck, your monthly car payment should be no more than $320. To give another perspective, Rico also likes to break down car costs on a per-day basis. Example: You have a $450 monthly car payment, add gas and scheduled maintenance and it will equal about $600 a month total. Your per-day cost for that vehicle is $20, whether you drive it or not. If you are an hourly wage earner of $15 an hour, you are working the first 2 hours of your job just to pay for your car.
Different advice from different people, but all with the same underlying premise: a car payment should fit WELL within your budget and income. Being “car-poor” takes the fun out of the new car smell.