I keep seeing encountering people who are struggling with their budget but have some ridiculous car payment. Let’s have a little discussion for people who are looking to buy a car. Here’s some advice I’ll give. Your mileage may vary (oh yes I went there). This advice is in USD but works anywhere.
Don’t get stuck holding the bag on a car that depreciates faster than you pay it off. I’ve done the math at a bunch of different interest rates, and the bottom line is that 48 months is the magic number for loan terms. At 4 years or below, you’re typically safe. Maybe you can push the boundary at super low interest rates, but there are other reasons not to finance for too long, including risk of financing a used vehicle for longer than expected reliable service life.
Next, write out your full budget and see what you have room for. Here’s where young folks get trapped: maybe if you’re still in school or fresh out of school and have super low living expenses, it will appear like you have tons of room for a fancy car. As soon as you become fully independent with a real place to live and food needs and all that jazz (which will very likely happen within a few years), that magic car budget will vanish before your eyes. Be realistic. Account for all the standard living expenses, fun budget, savings, and then be honest – what do you really have to spend on transportation each month? For a lot of people, it’ll probably be a few hundred bucks. Then, subtract what insurance and gas and other associated fees will cost you, and multiply what you’re left with by 48. That’s what you can afford to finance (including interest!)
Does the number come out well under $10,000 (or equivalent low amount for whatever country you’re from)? For many people, it probably does. Don’t be discouraged, for you can get a great reliable car under ten grand.
Does the number come out to less than $5000? Very common! Save up and buy a car in cash.
I feel like people tend to look at $20K as cheap for a car, but it’s not cheap at all. Include taxes and fees, finance over 5 years at 5% and you’re looking at well over $400/mo. Then tack on insurance (easily $200 for a young driver), and then tack on gas. That $20K car costs you $500-700 per month! If you aren’t bringing home $5K+ each month, that probably doesn’t fit in your budget. The reality is, even a $20K car is not realistically affordable for the majority of income earners.
What about $30K+ cars? Radio commercials make them sound so affordable, but cars in the $30K-$40K range should be seen as luxury vehicles. We’re talking six figure income required. Yet, so many people buy $30K SUVs and get screwed by the monthly payments. Please don’t let it happen to you.
I work in a respectable profession and make a fairly decent wage. People always ask me why I drive a 10 year old car. It’s because that’s what I can realistically afford! Society in general has inflated expectations on what they can afford. It’s time to fix this and save people from ruining their budgets.