Can I afford it? (new car that is)

**disneysteve** · 12-13-2012, 01:30 PM

Originally posted by MKKShah View Post

How much car can I afford? What will you do in the above scenario.

These are two very different questions.

Rule of thumb for car purchases is to pay cash if you can. If not, your loan should have a payment of no more than 10% of your monthly take home pay for no longer than 36 months.

Your monthly take home is $4,600, so you need a payment no higher than $460.
That gives you $460 x 36 = $16,560 plus any downpayment.

What would I do? I wouldn't buy a new car.

**ua_guy** · 12-13-2012, 02:04 PM

I might have a different perspective. I think your finances look fine (great, even, compared to my situation), and if a nice car is something you enjoy, everything else is in place, so why not?

If you're buying it for purely purposes of having a 2nd automotive appliance around the house, you know the rules. Pay cash, don't buy new, and good resale value shouldn't be a factor if you're planning to drive the wheels off of it. That's what I tell people who say they want to buy a slightly used Toyota. "But they have great resale value" -Yes, they do, which is why you're at risk for paying too much for a used car

**jaine** · 12-13-2012, 05:35 PM

I think it's a good idea to pay cash for anything that depreciates in value ... including cars!

**UnknownXV** · 12-13-2012, 05:56 PM

Do you have any debt? If not, Sure you can. You're saving a ton of money. Doing very well there.

I'd definitely recommend saving up and paying for the car in cash though. You can often get special deals if you pay it in cash, and of course no interest.

If you can push your monthly savings up to 2k, and put all of this to the side, it would only take one year to be able to afford a very nice $24,000 car. Completely paid off.

**MKKShah** · 12-13-2012, 10:02 PM

Originally posted by disneysteve View Post

Rule of thumb for car purchases is to pay cash if you can. If not, your loan should have a payment of no more than 10% of your monthly take home pay for no longer than 36 months.

Would you apply this rule in my considering that I am looking at holding the car for at least 10 years (unless I am stuck with a lemon)?

Originally posted by disneysteve View Post

Your monthly take home is $4,600, so you need a payment no higher than $460.
That gives you $460 x 36 = $16,560 plus any downpayment.

I too agree with this rule. But I used to think that "take home" used to refer to gross - taxes, i.e net pay. In my case, the "take home" I have listed above is (gross - 401(k) deductions - automated savings). Monthly savings through these two vehicles alone comes out to $2200 per month. In addition, I get about %5500 employer match annually, approx. $5K stock incentive, and about $5K worth of restricted stock. Total monthly savings thus will likely be in the neighborhood of $3000.

The carrying cost of the older, paid off sedan is just $50 / month for insurance (excluding maintenance).

Would you still apply the 10% rule in my case?

Originally posted by disneysteve View Post

What would I do? I wouldn't buy a new car.

I used to hold the same opinion religiously up until now. However, after some looking around, it looks like new cars now might be a better option. My reasoning is that the economy slowed down 5 years back, and collapsed 4 years ago. Auto sales plummetted by 50%. Add to this the fact that people are holding on to their cars longer. This means the supply of 3-4 year old used cars has been severely constricted.

Until a few years ago, car prices declined sharply in the first 3 years. For instance, I bought a 3 year old sedan with 30K miles for about $19K. The original owner purchased it for $35K. A depreciation of 45%.

The same model today only has a depreciation of about 23%, and this depreciation seems only fair since the car was used for several thousand miles after all. In this case, it seems to be that a new car (purchased with the intent of holding for the long term) is the better choice.

Do you agree?

**MKKShah** · 12-13-2012, 10:06 PM

Originally posted by ua_guy View Post

I might have a different perspective. I think your finances look fine (great, even, compared to my situation), and if a nice car is something you enjoy, everything else is in place, so why not?

If you're buying it for purely purposes of having a 2nd automotive appliance around the house, you know the rules. Pay cash, don't buy new, and good resale value shouldn't be a factor if you're planning to drive the wheels off of it. That's what I tell people who say they want to buy a slightly used Toyota. "But they have great resale value" -Yes, they do, which is why you're at risk for paying too much for a used car

I agree with the above sentiment. While I am looking for an "appliance", unlike a washing machine or a dishwasher, I will be sitting inside this appliance. over a 10 year period that comes to about 3650 hours (at 1 hour per day), or the equivalent of 152 straight days inside the car. To think about this way...would I pay $10K for a 152 day vacation? absolutely....and that is my line of thinking (at least to steer my frugal self towards a luxury auto purchase).

**MKKShah** · 12-13-2012, 10:09 PM

Originally posted by jaine View Post

I think it's a good idea to pay cash for anything that depreciates in value ... including cars!

Why would you not consider 0% financing? AT lest one of the car that I am looking at mentioned that they are giving 60 month 0%. The dealer also said that the price won't change regardless of whether I choose to finance with them or pay cash. He also added that the concept of getting a huge discount for cash buyers is an "urban legend". Not sure if I believe him on that...but looks like internet has narrowed the information asymmetry between the dealer and the customer. Most people are aware of at least the invoice price and the MSPR and so know the range to negotiate within.

**MKKShah** · 12-13-2012, 10:11 PM

Originally posted by UnknownXV View Post

Do you have any debt? If not, Sure you can. You're saving a ton of money. Doing very well there.

I'd definitely recommend saving up and paying for the car in cash though. You can often get special deals if you pay it in cash, and of course no interest.

If you can push your monthly savings up to 2k, and put all of this to the side, it would only take one year to be able to afford a very nice $24,000 car. Completely paid off.

I don't have any debt. Not sure why folks are emphasizing so much on "cash". Is 0%, or 1.99 or say even 3% interest rate so bad? (these are the going rates for someone with good credit today). What do you think?

**UnknownXV** · 12-13-2012, 11:46 PM

In your situation, considering you do have a lot of savings already, I wouldn't say that getting it on a loan is terrible. I'm just naturally averse to debt of any kind besides maybe a mortgage.

Don't mind my bias. If you really want to get it now, you're in a situation where you can.

That's the funny thing about credit.. the only people who can use it responsibly are people who don't really need it.

**bjl584** · 12-14-2012, 04:12 AM

We normally recommend not to take on a loan that is more than 10% of monthly take home with a loan not more than 36 months.

But, your finances look great. I wouldn't see a problem with you taking advantage of a 0% interest loan for 60 month on a new car.

**disneysteve** · 12-14-2012, 05:10 AM

Originally posted by MKKShah View Post

Why would you not consider 0% financing? AT lest one of the car that I am looking at mentioned that they are giving 60 month 0%. The dealer also said that the price won't change regardless of whether I choose to finance with them or pay cash. He also added that the concept of getting a huge discount for cash buyers is an "urban legend".

Quite frankly, I don't believe him. When the dealer gives you 0% financing, it comes at a cost to them. The "free" money isn't free for them. Somewhere, somehow, they have to make up the cost of that loan. Maybe they don't do it in the sale price of the car but they might work it in in a less obvious way. I bought a car in June. In addition to the car price, there was also the extended warranty price which was negotiable. There were some other add-ons that I wanted that were negotiable. Something as simple as what type of floor mats I got or whether or not I took delivery with a full tank of gas was negotiable. So there are a lot of little places that they can ding you for a few dollars here and there when they know that you are taking the 0% deal.

All of that said, I don't object at all to 0% financing as long as you've done your homework and are happy with the deal you are getting. Heck, I bought my car for 2.99% in June. I could have paid cash but chose not to for cash flow reasons. However, I am also paying $1,000/month which is nearly 3 times the scheduled payment so that the loan will be retired in about a year.

**disneysteve** · 12-14-2012, 05:17 AM

Originally posted by MKKShah View Post

Would you apply this rule in my considering that I am looking at holding the car for at least 10 years (unless I am stuck with a lemon)?

Yes, I don't think how long you hold the car alters this advice. I bought a car in June and traded in a car that I had owned for 14 years (which was bought used). The one I just got is a 2006, so 6+ years old and I intend to keep it for another 10 years hopefully. I still stuck to that rule.

I too agree with this rule. But I used to think that "take home" used to refer to gross - taxes, i.e net pay. In my case, the "take home" I have listed above is (gross - 401(k) deductions - automated savings). Monthly savings through these two vehicles alone comes out to $2200 per month

I think this is a valid point. I think it's fair to use your base take home before you carve out the savings.

it looks like new cars now might be a better option.

I think this can be true on a case by case basis. Some cars are holding their value extremely well and you may only save a couple thousand by going used but getting a car with 15-20K miles in the process. The new one can sometimes be the better deal. Also, if you are financing, the offers are usually better on the new vehicles so that needs to be factored in.

What I object to is people saying things like, "I don't want to buy someone else's problems." There is that mindset that "used" equals "damaged" in some way, which certainly isn't true. As I said, I just bought a 2006 model in June and I've been very happy with it. Was it perfect? Nope. But I actually paid less in actual dollars than I paid for my last car in 1998 (16K vs. 18.5K).

**ua_guy** · 12-14-2012, 07:32 AM

Steep discounts just because the payment method is cash is probably an urban legend at best. It's generally more profitable to sell a car with financing than a cash deal. It's only advantageous to the buyer who doesn't have to do loan paperwork, pays nothing in interest, owns the vehicle from inception.

The dealers sometimes gets to hold back a percentage of your interest rate...that's why it's great to line up your own "best" financing before, and then see if the dealer is willing to be competitive through the banks they work with.

New cars are generally discounted with a cash rebate OR a financing incentive. 0% is a wonderful thing.

**disneysteve** · 12-14-2012, 07:49 AM

Originally posted by ua_guy View Post

Steep discounts just because the payment method is cash is probably an urban legend at best. It's generally more profitable to sell a car with financing than a cash deal.

That's true when there is interest involved. When it is 0%, however, how could it be more profitable to the dealer to lend you money for free for 5 years? The only possibility is if the manufacturer is paying the dealer an incentive.

Can I afford it? (new car that is)