General rule about car payment

[emanon1501]

Our family mini-van is not going to last too long. I worked too hard to clear up our debts to be almost debt free (we still have mortgage), and I dont want to kill ourself with car payments.

What is the general rule for car payment based on budget? Is it 10 percent or what?

I am just looking for a general guide line, so that we can make a good decisions and not be in too much of bad debt.

We are going to look at used cars only.

Any suggestions or feed back will be appreciated.

Thanks

[disneysteve]

If you must borrow, the rule of thumb is to take a loan for no more than 3 years with a monthly payment of no more than 10% of your monthly take home pay.

[snafu]

It's important to choose the type of vehicle that serves the needs of your family. Some vehicles have a better reputation/repair record than others. If you drive winter snow/ice conditions front wheel drive makes it easier to get out of snowbanks. If you're buying from a dealership, end of month is good timing...they need to make their numbers

[YLTL_Dan]

The rule I use is to not spend more than 20% of your annual income on a vehicle purchase. It's easy to say buy a car with cash, but much harder to do of course. Cash is the best way to make sure you don't buy more car than you can afford. Could you start saving up money now and continue driving the minivan long enough to afford a new (used) one with cash?

[emanon1501]

Originally Posted by YLTL_Dan

The rule I use is to not spend more than 20% of your annual income on a vehicle purchase. It's easy to say buy a car with cash, but much harder to do of course. Cash is the best way to make sure you don't buy more car than you can afford. Could you start saving up money now and continue driving the minivan long enough to afford a new (used) one with cash?

I would never buy a car with cash. I dont like to see my savings go down because it took me too long to build that up. The intreast rate is so low on used car, so there is really no need for me to pay car cash, at least I think so.


The van is for my family, I prefer to have them drive a newer safer car that works. The one we have is going to fail, but still works and it still has good trade in value. If I wait too long, we will be worse off.


We are not going to take out loan more than 15,000.


Thank you all for your feed back.

[greenskeeper]

Originally Posted by emanon1501

I would never buy a car with cash. I dont like to see my savings go down because it took me too long to build that up. The intreast rate is so low on used car, so there is really no need for me to pay car cash, at least I think so.


The van is for my family, I prefer to have them drive a newer safer car that works. The one we have is going to fail, but still works and it still has good trade in value. If I wait too long, we will be worse off.


We are not going to take out loan more than 15,000.


Thank you all for your feed back.

Depends how adequate your savings are. If you could buy the car with cash, then "repay" your savings account with what the calculated car payment would be. You are laying that amount out per month anyways. Again this depends on how much the car would wipe out your savings.

I agree that with interest rates so low, it is also a good decision to finance if your savings can't take that much of a hit.

[Hector]

Originally Posted by emanon1501

I would never buy a car with cash. I dont like to see my savings go down because it took me too long to build that up. The intreast rate is so low on used car, so there is really no need for me to pay car cash, at least I think so.


The van is for my family, I prefer to have them drive a newer safer car that works. The one we have is going to fail, but still works and it still has good trade in value. If I wait too long, we will be worse off.


We are not going to take out loan more than 15,000.


Thank you all for your feed back.

if interest on your savings minus tax on this interest is not more than interest rate on your car loan, you are loosing money regardless how low is interest rate on used car.

its a myth that newer car is safer than used one. a car worth 15k is a LOT for someone who is trying to get out of debt.
general rule about car payment is to buy a car that is affordable. which means a 15k car is not affordable for someone who is trying to get out of debt.

[maat55]

We pay cash for cars. Our car fund is separate from our EF and other funds. When times get hard, I would rather have car fund savings and no payments.

As DR says, 100% of all cars that get repoed had a loan on them.

One thing to remember about financing, there is no such thing as free money. You will likely pay more for the car when borrowing. I currenly earn 3.1% on my car fund, yet I would much rather pay cash and rebuild.

[Hector]

Originally Posted by maat55

We pay cash for cars. Our car fund is separate from our EF and other funds. When times get hard, I would rather have car fund savings and no payments.

As DR says, 100% of all cars that get repoed had a loan on them.

One thing to remember about financing, there is no such thing as free money. You will likely pay more for the car when borrowing. I currenly earn 3.1% on my car fund, yet I would much rather pay cash and rebuild.

where do you make 3.1%?

[maat55]

Originally Posted by Hector

where do you make 3.1%?

It is a go green checking account at our local bank(RCB). They will not allow anyone to setup an account over the internet.

[YLTL_Dan]

Originally Posted by emanon1501

I would never buy a car with cash. I dont like to see my savings go down because it took me too long to build that up. The intreast rate is so low on used car, so there is really no need for me to pay car cash, at least I think so.

Originally Posted by emanon1501

Our family mini-van is not going to last too long. I worked too hard to clear up our debts to be almost debt free (we still have mortgage), and I dont want to kill ourself with car payments.

So you don't want to kill yourself with car payments... you just want to torture yourself?

I know it's painful to burn the cash you've managed to save on a car. However, as others have pointed out, as soon as your car is paid for, you can replenish your savings account.

I don't care if I got a 0% APR on a car, I still wouldn't take a loan. You lose touch with reality when you use loans because all you focus on is the monthly payment. It's more important for me psychologically to not take on more debt than theorizing how I my money is better served elsewhere.

[bjl584]

If you have enough savings to cover a car purchase and still have 6 months expenses in cash, then it's a no brainer. Pay cash for a replacement car. If however, buying a car for cash means depleting your cash reserves, then you will want to finance. Just stick to the general rule of thumb for financing vehicles. The loan should be no more than 3 years and the payment shouldn't be more than 10% of your monthly take home. If something were to happen that casused you to tap into your cash reserves, and you didn't have any cause you spent it all on a car, then you will be kicking yourself everytime you swipe your credit card.

[graceful]

Psychologically, I understand what OP is saying about the painfulness of paying for the car in cash.

We have a car cash fund and had enough to pay for my car with a check. Went to the dealership and got approved for a 0.9% loan for 3 years. Paid the downpayment with a credit card for the rewards and asked if I could make any other payments with the credit card. The dealership did have a cap. Paid for half of the purchase price via the credit card (paid off at end of month) and a check. Financed the rest at 0.9%

I left the balance of my car fund untouched and have it there in case I ever have to pay off my car in full. I pay extra on my car loan just from our monthly income and should pay it off before the original 3 year loan. Once done, I will start adding funds to the car account account for the next vehicle.

I just LIKE having the psychological security of having the money in the bank as well as knowing that my monthly income is enough to cover the loan without paying out of the account. Lol.

[disneysteve]

Originally Posted by graceful

Psychologically, I understand what OP is saying about the painfulness of paying for the car in cash.

We have a car cash fund and had enough to pay for my car with a check. Went to the dealership and got approved for a 0.9% loan for 3 years. Paid the downpayment with a credit card for the rewards and asked if I could make any other payments with the credit card. The dealership did have a cap. Paid for half of the purchase price via the credit card (paid off at end of month) and a check. Financed the rest at 0.9%

I left the balance of my car fund untouched and have it there in case I ever have to pay off my car in full. I pay extra on my car loan just from our monthly income and should pay it off before the original 3 year loan. Once done, I will start adding funds to the car account account for the next vehicle.

I just LIKE having the psychological security of having the money in the bank as well as knowing that my monthly income is enough to cover the loan without paying out of the account. Lol.

I totally get this. I don't have a "car fund" per se, but we do have liquid savings sufficient to pay cash for a car. Still, when the time comes I will probably put down a nice down payment and take a loan and cash flow it to pay it off well ahead of the 3 year term. The amount that our savings would earn in 12-18 months at current rates is really insignificant in the big picture. Even though I know the numbers would strictly support no loan, money isn't all about dollars and cents. It is about security and comfort zone too.

It is really the same reason why we have a mortgage. We could pay off our house tomorrow (well maybe next week) if we wanted to. We have more than enough money to do so. We just choose not to.

[emanon1501]

After shopping around for cars. We could not justify to take out a loan becasue our minivan has what we want along with all the safety features that newer cars have. We decided to let a man who runs his business out of his home garage to rebuild the transmission for $1,300. I will fix other little minor issues, such as brakes, computer module, etc for about $500. It feels good that we will not have a car payment for at least a year or two. Thnak you for all your feedback.

[MonkeyMama]

@OP - That is great!

To add to the cash discussion - we only pay cash for our cars. (When starting out - would finance for a year at most - have had plenty of time to save cash for every car since). Literally spending that kind of money on a car can leave you *Cash poor* or simply *cash poorer.* But, the point is say things are going well and you want to spend $30,000 on a car, and then you regret it later. Maybe you lose your job? Well, you can always sell the car. It's not quite as simple as you spent that cash and you can never get it back. Psychologically, I'd rather pay cash all the way. If I finance, it's somewhat out of my hands. I am still paying for the car and I then I lose a lot of flexibility. That is why I do not like to buy things I don't have the cash for. (If you have the cash and choose to finance it- I don't think that is quite the same - but I also don't see the point. But, I'd probably just downsize the car if I had future cash flow problems. As is, as a cash payer, I doubt I will ever pay that much for a car. I think it hurts more to pay cash and you think about it a wee bit harder, too. I know people are usually astounded that we pay cash because they imagine we paid 2-5 times as much for our cars. Every decade we can afford a much nicer car than the last one).

[ProjectX]

Hope everything works out for you. Good Luck.

[YLTL_Dan]

Originally Posted by emanon1501

After shopping around for cars. We could not justify to take out a loan becasue our minivan has what we want along with all the safety features that newer cars have. We decided to let a man who runs his business out of his home garage to rebuild the transmission for $1,300. I will fix other little minor issues, such as brakes, computer module, etc for about $500. It feels good that we will not have a car payment for at least a year or two. Thnak you for all your feedback.

That's awesome! As my parents always told me... it stinks having big maintenance bills, but it's better than a car payment every month!!

[KiwiJo09]

After buying Hubby's car (and most of you will bear witness to this), I had buyer's remorse. It turned out to be the best possible decision we could have made. We keep up with the payments fine and the car runs great. His old car had nearly 200,000 miles on it and was costing us more in repairs than I care to admit. Even with the car payments, we're saving money with this car. Especially since newer cars are more gas efficient.

[disneysteve]

Originally Posted by KiwiJo09

newer cars are more gas efficient.

This can not be stated as fact uniformly. Yes, there are newer cars that are more efficient. There are also newer cars that are less efficient. It all depends on the make and model. There were cars in 1980 that got better gas mileage than many of the "high efficiency" cars today. It all depends on what you are comparing.