How do you decide how much you want to spend on a car?

[disneysteve]

I have tried both ways and I really don't think paying cash is the way to go. Let me explain. First, I did pay cash for my last car, a new 05 Sienna in 2005. That was a pretty hefty chunk of cash. It is paid off. However, having done that, from now on I would finance a car unless it has some ridiculous interest rate. That outlay of cash to buy the car could have served me better to be invested. To us, it seems to make MORE sense to finance our car, and instead put more money toward the mortgage which had a higher interest rate than the car did.
Something called "new car fever" seems to hit people as they are nearing the final payment. If you are a person who tends to experience this (as I do), opting for the longer payment like 5 yrs helps to quell this idea!

As with all things we discuss here, there are always exceptions and it helps a great deal to know your own personality and spending habits. A few comments in response to your post:

1. I don't think buying a new car is a good idea financially speaking in the vast majority of cases.

2. When comparing interest rates on a mortgage and a car payment, be sure to factor in the tax advantage on the mortgage, not just the base rate. If your mortgage is at 5%, the true rate after the deduction is more like 3.75%. If the true rate is still higher than the rate on a car loan, I would agree that it makes more sense to finance if the money will otherwise be used to pay down the mortgage. In recent years with car sales in the gutter, 0% to 2% rates have been quite common and worth considering. The problem, though, goes back to point #1. Buying new cars isn't usually such a good idea and those super-low rates only apply to new car purchases.

3. Many people with "new car fever" are not put off by the longer loans. What ends up happening is they buy a car with a 5-year or longer loan. Then in 3 years, they get "tired" of their car and trade it in, rolling over the balance of the loan into the next loan. Then they show up on this forum and post that they owe $25,000 on their car that is only worth $12,000. Had they gone for the 3-year loan initially and bought something that they could afford to pay off in 3 years, they wouldn't have ended up in that situation. If they really wanted to replace their car after 3 years, at least it would have been paid off.

[ScrimpAndSave]

From my standpoint...and from what I am used to...

My father would always buy a car that was worth around $10,000...and then he would drive it for 5-6 years...sell it privately for maybe $2,000-$5,000 (depending on the model) and then buy another one with cash. Now that my car is at that $5,000 area...I guess I am looking to do the same.

I am going to try to save up enough for a new one and see if this one will last me another two years. It seems like that is probably the best thing to do financially.

::sigh:: I am going to have to suck it up and pay for that $300 repair before it turns into something major.

Thanks all.

[ScrimpAndSave]

Oh and by the way my mortgage rate is 5.375% and I am in the 25% tax bracket if that makes any sense.

[EEinNJ]

My strategy is to save $400/month towards my next vehicle, so my "payment" is to myself, collecting interest instead of paying it. Using this strategy, I've not had a car payment in 13 years.

I've had mostly used vehicles, but not beaters. However, my last 2 purchases were new- with cash. I've discovered that repair costs can make the total cost of ownership ("TCO") on an older used vehicle just as high as buying new, and the hassle of getting repairs done pushes me to dump it.

That $300 repair is probably just the beginning on a 12 year old car. Fix it, sell it, buy a 25K car at 0% APR and start saving for the car after that. It may take 3-4 years or more, but eventually you'll be enjoying paying cash for a nice new(er) car.

[ScrimpAndSave]

EEinNJ, although this sounds like a good idea...I do not think I would be able to pay off a car loan AND save for another car at the same time.

[disneysteve]

I've had mostly used vehicles, but not beaters. However, my last 2 purchases were new- with cash. I've discovered that repair costs can make the total cost of ownership ("TCO") on an older used vehicle just as high as buying new

Personally, I think the sweet spot is 2-3 year old cars. They have suffered their steepest depreciation but still have low mileage, are still under warranty and are still in nice condition. I bought my Camry one year old and our Sienna 2-3 years years old.

[ScrimpAndSave]

Even with 0% APR...the car loses 20%-30% of its value when it is driven off the lot, right? I would much rather go with a car that is a few years old.

[disneysteve]

Even with 0% APR...the car loses 20%-30% of its value when it is driven off the lot, right? I would much rather go with a car that is a few years old.

Exactly. That's why I think it can make better financial sense to pay a higher finance rate on a used car.

[zetta]

And, there is nothing wrong with buying a nice car either. You dont' have to drive some beater unless you need to financially.

This is why I advised the OP to figure out the cheapest car she would be happy driving for 5-10 years -- ie something nice enough to avoid new car fever, but cheap enough that she could save up and pay cash.

Personally, I think the sweet spot is 2-3 year old cars. They have suffered their steepest depreciation but still have low mileage, are still under warranty and are still in nice condition.

I second this. 2-3 years old and 20k-30k miles.

[ScrimpAndSave]

After researching a little, I think I would probably go with a 2005-2006 Acura RSX for around $16,000. They have around 50k on them though...I don't know if that is ok, but I never had a car with less than 100k on it!

Acuras have Honda parts right? So it shouldn't be too expensive when repairs come up. My BMW (while it is very nice) is crazy expensive to fix,

[cschin4]

I second this. 2-3 years old and 20k-30k miles.

I have done this in the past as well. But, you can pay too much for a used car as well. With a new car, you get new brakes, new tires, new safety features and a warranty. And, used cars have higher interest rates to finance. So, I have bought used, financed, and paid cash and have tried all the options. My conclusion is that buying new is a reasonable choice as long as you really do keep the car. The main thing as Steve pointed out is to know yourself.
If you want to trade more often, buy used. If you really will keep a car for years, consider new. But, be honest with yourself. Don't pretend you will keep a car for 10 yrs if you really won't. The novelty of any car wears off as soon as you spill your first cup of coffee in your car!

[disneysteve]

But, you can pay too much for a used car as well. With a new car, you get new brakes, new tires, new safety features and a warranty.

You can certainly overpay for a used car. If the price isn't well below original price, it may not be worth it. But if I can buy a 2 year old car for 25% less than the same model new, though it may only last 10 years instead of 12, the per year cost is still lower. All depends on the numbers.

Also, consider that with those new brakes and new tires and new everything, you are also getting a new model with no track record. We bought our first minivan new, a 1996 Dodge Grand Caravan. We proceeded to have it recalled 5 different times during the 4 years we owned it. It was then destroyed by a fire caused by a manufacturing defect. So new doesn't always equal better.

[cschin4]

So new doesn't always equal better.
__________________

True. I think the quality is deteriorating for many brands.

[ScrimpAndSave]

I would LOVE something like this:

Murray Motors of the Lehigh Valley

And am positive that I would drive it for more than 5 years.

But I think that is sort of pricey...

[TurnDebtIntoDebt]

In deciding how much of your income should go towards transportation expenses, always stay below 25% of your monthly income. If you make $2500 a month, for example, don't go over $625. This includes your payment, insurance, gas, maintenance, etc. Also, keep in mind, staying up to date with current models is not a all-wise decision. If you can save for a used car, save for it. If one of your financial goals is to be financially independent, you can't become it, spending the majority of your money on things that depreciate. (hint)