How much is too much to pay for a car?

[disneysteve]

I've noticed a pattern in the various threads by people asking for help with their finances and debt situations. Invariably, they have one or more expensive car loans that the rest of us deem out of proportion to their income. Many of us chime in with the advice to sell a car or two and replace them with more affordable options.

I think we're all familiar with guidelines on buying a home:
Purchase price shouldn't exceed 3 times your income.
Monthly payments should be no more than 28% of monthly income.
Total debt servicing shouldn't exceed 36% of income.

But I don't recall any rules of thumb for car buying. For many young adults and folks just starting out, it is the car that is the largest purchase they've ever made. Even for those of us more established in life, some guidance is needed in deciding how much to spend for a vehicle. Despite our advice, once someone already has a car payment they can't afford, there is often very little they can do about it. It would be much better to avoid that situation in the first place.

So my question is this: Are there any common guidelines or rules of thumb to help people decide how much they can afford to spend on their cars?

[Broken Arrow]

Wow, that's a good question, and I'd be interested in seeing what other people's thoughts are on this one.

For now, I'm thinking more along the lines of what I can actually afford. Which is around 15k.

[simpleyme]

well to preach Dave Ramsey no more than half your income should be tied up in depreciating assets

meaning if you make 40 you should never buy a car worth more than 20

I think it is a given if you have to make payments you cannot afford the car, it is another matter if you choose to make payments( you have the money but can make more in investment)

I once financed a car and it was murder making the payments even tho I could "afford " it LOL

[scfr]

My number one piece of advice for young people starting out: Put off buying that first car just as long as you can!!!

Don't buy a car unless you absolutely must. Walk, ride the bus, or ride a bike. Some cities have car-sharing programs available now. On those rare occasions when you really do need a car, rent one for a couple days. If there are 2 drivers in your family, try to get by with just 1 car. Americans tend to justify owning a car far too easily. This is the prime example where people confuse a "want" with a "need." In most cases, a car is a want, not a need.

Teenagers don't "need" cars. College students rarely "need" a car. People who aren't working probably don't "need" a car.

[MonkeyMama]

If I think hard the rule for us is we have always had to be able to pay it off in 1 year. I understand when you buy your first car often you don't have the cash. But you can start much more modestly (& most people don't). Dave Ramsey I agree with 100% on this topic.

For us:
Age 16: Bought $1500 car - paid one year
Age 22:Bought $6000 car - paid 5 months
Age 24: Dh paid cash for $8k car (upgraded from his first $1k car)
Age 25: Bought $1k car - pocketed net $2k in sale of old car (bad planning, needed a family friendly car - interim car)
Age 29: Bought $14k van - financed $5k and paid in 1 year
Future plan: Pay $20k/each CASH for 2 new cars at around 40. Dh drives 1/2 as much as me so expect to replace both about same time. He has no collission coverage so we already have cash to replace with a decent $10k car in the interim if something happens. IF we can wait a decade he wants to splurge on a hybrid.
{Notice the cars we spent the very least on we drove the longest. The only cars that ever had much in repairs were the $5k car and the much newer van - go figure. Plus insurance/taxes/license all MUCH cheaper on the older cars}.

So my answer is start small, build up, and with time it doesn't really matter.

I totally agree though. Having never spent much on cars or not having regular car payments, I am always amazed how much people tend to spend on cars. It's by far the BIGGEST budget buster.

Lord knows if money was tight we would sell our second car in a heartbeat too. Total luxury.

If more people though harder about their car purchases they would be in much better financial shape. I live in an area where it is really hard to get by without a car, but doesn't mean it has to cost a lot of money. & I totally get our 2nd car is a luxury.

[PrincessPerky]

I think rules of thumb are a bit..hard. different people have different levels of comfort.

In general though I think no matter what you are doing if more than half your income goes to debt (house car or CC or whatever) than you prolly have too much. which is a bit like Dave's only I think your payments matter a bit more than income making 40K a year can have a take home varying from 3K a month to 4K....depending on how you filled out your paper work.

least life is easier for us now that less than half our take home has to go to debt (more does to pay it off, but if anything happened I could drop back)

[jIM_Ohio]

well to preach Dave Ramsey no more than half your income should be tied up in depreciating assets

meaning if you make 40 you should never buy a car worth more than 20

I think it is a given if you have to make payments you cannot afford the car, it is another matter if you choose to make payments( you have the money but can make more in investment)

I once financed a car and it was murder making the payments even tho I could "afford " it LOL

No more than half your debt in depreciating assets would keep people like Dave Ramsey in business until he retires.

I would say 0% debt for most people- pay cash for depreciating assets. Pay cash, especially if you have other consumer debt.

That said, we are financing two cars right now, so even my wife and I don't follow that advice. In my wife's case, she drives 25k miles per year for work, so she leases, and I wanted a pickup truck to haul all my soccer equipment around.

But we do plan to pay cash for car #4. Car 1 financed for 4 years. Car #2 financed for 3 years, the next car (replacing the lease) will be financed for 2 years, the 4th car should be paid for in cash.

The cars and house are the only debt we carry right now.

[sweeps]

I see that advice a lot about not financing depreciating assets. Why? Whether an asset appreciates or depreciates is completely irrelevant as to whether you should borrow to buy it.

First if you don't need it or you can't afford it, don't buy it. Period. Find an alternative or go without.

Second, if you do need it and you can afford it, then borrow if it makes financial sense to do so. Who cares if the asset depreciates. If you can get a 4% car loan while investing at 9% or while paying off a 19% credit card, do it!

[LivingAlmostLarge]

On another message board a financial person suggested 20% of your income. Keeps it in check.

Another thing to consider if you make $200k it's very different to afford a $20k car new versus someone who buys a $20k car making $60k.

[simpleyme]

[QUOTE=jIM_Ohio;138976]No more than half your debt in depreciating assets would keep people like Dave Ramsey in business until he retires.

no that's not debt that's things you own

according to Ramsey you should not have more than 1/2 years income tied up in depreciating assets ,even if you own the items

so if you own a 50K car outright and only make 50K a year he thinks you should sell it and invest the money where the money will gain in value

DR also states if you cannot figure out why your kids collage fund is not fully funded you should look out in the driveway ( I think that is pretty funny and sadly true for many)

[sweeps]

What happens if your house is depreciating? Which is very possible considering our current housing market.

[simpleyme]

I see that advice a lot about not financing depreciating assets. Why? Whether an asset appreciates or depreciates is completely irrelevant as to whether you should borrow to buy it.

First if you don't need it or you can't afford it, don't buy it. Period. Find an alternative or go without.

Second, if you do need it and you can afford it, then borrow if it makes financial sense to do so. Who cares if the asset depreciates. If you can get a 4% car loan while investing at 9% or while paying off a 19% credit card, do it!

good point ;-) I do not believe anything should be financed except a house

I think depriciation does count as you should be able to sell it for what you owe on it at any point ,upside down loans are not a good thing from what I have seen

[sweeps]

But who cares if you are upside down on the loan if you're making better use of that money elsewhere (such as retirement investing or credit card payoff)?

If paying off the difference between the loan balance and what you can sell the car for is causing you hardship, you really couldn't afford the car to begin with.

[simpleyme]

so why would you buy a car if you owe money on credit cards anyway?

[sweeps]

so why would you buy a car if you owe money on credit cards anyway?

I wouldn't, but let's face it, lots of people do.

So if these people start listening to the (questionable) advice to never borrow for depreciating assets, they're going to make an even bigger financial mistake by foregoing a low-interest loan to pay off high-interest debt.

It's the same reason the snowball method is flawed. Why pay off a low-interest loan when the high-interest loan is hurting you worse.