How much car can you afford and how long should your loan be?

In 1994 my mom and I went to a used car lot to look at used cars. My parents had told me that my budget was around $8k. This meant very little to me at the time. First off, this was a tremendous amount of money to spend on a car for a 16 year old, but that’s certainly not the point of this post. I just wanted you to know that I’m not completely delusional.

Anyway, mom took me to the lot near our house. There was a beautiful green 1968 Mustang on the lot. I walked up to the car and imagined driving this beautiful piece of American history around town with my unfortunate girlfriend. Just then the sales guy strolled up. He introduced himself, and then asked the $1,000,000 question (err $8,000 question), “How much are you looking to spend on a car?” Mind you, I was 16 year old dumb kid at this point. I was simply Pete. The Planner was just a twinkle in my eye. “$8,000!” I offered. “Perfect, that’s exactly what this car costs!” he answered. My mom rolled her eyes, and we left.

Buying a car is an emotional process. Their salesperson’s goal is to get you imagining that you are driving the car. And then they try to turn that vision into reality. Your brain is either your asset or adversary at this point in time. It’s your choice. With the tips that I’m about to provide you, your brain will be your ally.

  1. Your total household transportation budget should be less than 15% of your take-home pay. It makes me sad when I see budgets that are filled with transportation expenses. I’m not calling a car a waste of money, but I’m suggesting that you can waste money on a car. I feel that it is nearly impossible to “accomplish” anything financially when you are paying a significant amount of your income towards moving your ass from location to another. Remember, this includes gas, insurance, maintenance, crown air fresheners, etc.
  2. You are best served to have a car loan that is 4 years or less. “Hey Pete, I just got a 2008 Honda Accord,” said a friend of mine. “Cool, did you get a good deal?” I followed. “Yep, very low payments. It’s an 8 year loan.” Crickets. Seriously, you can afford anything in the world if you stretch the payments out far enough. But you are best served by not basing the affordability of the car, on the payment itself. An eight year car loan on a used car is just stupid. Unlike many, if not most, personal finance experts, I think that leasing a car is a decent solution to affordable car ownership. I will detail this in a later blog post. Don’t go running out and lease a new rig today. Give me a chance to write the post first. Thank you.
  3. I prefer pre-owned cars. This next tip is not necessarily tip. It’s just what I do. I don’t buy new cars. I buy pre-owned cars. The new car smell isn’t worth a 20% markup in my mind, so I just buy the new car smell spray and apply it to the floor mats of my much more affordable 3 year old “new to me” car.
  4. Know what you can afford before you go shopping. The biggest car buying mistake you can make is to figure out what you can afford AFTER you have left the house to go look at cars. There’s just too much stimulus at that point to make a wise decision. Don’t ask the salesperson to weigh in on this part of the discussion either. I’m not hatin’ on a brother, I just think that your financial situation shouldn’t be tainted by the person trying to sell you something.
  5. If you can’t pay cash, pay off your car ASAP. I would prefer that you pay cash for a car. But I’m a realist. I realize that you may not be able to swing this. If that is the case, then shame on you. You’re a terrible person. Kidding. I don’t really care. It’s cool. If you can’t afford to pay cash for a car, then you should still make it a priority to have 100% ownership of said vehicle as soon as possible. You can save $100’s if not $1000’s of dollars buy paying off a car early. A car is a depreciating asset. That means that it continues to go down in value (a house used to be considered an appreciating asset prior to the housing meltdown; it will be considered that again soon). You want to pay off a depreciating asset as soon as you can. By doing this you are putting yourself into a better financial position. You are maximizing the time in which you have control over a higher priced asset. There’s math behind this assertion, but frankly I’m feeling a bit lazy today. Just take my word for it.
  6. Don’t have several different dealers run your credit. Having several people run your credit is a really bad thing. Not “Christina Aguilera forgetting the words to the National Anthem at the Super Bowl” bad, but bad. It is possible for you to get a worse car deal at the fifth dealership that you visit because there would have been too many credit inquiries on your report. This would lower your score, and hypothetically give you worse credit terms. Why buy the cow when you can get the milk for free? Yeah, I know that idiom doesn’t work here, but I wanted to use it. 🙂

Keep your head about you when you buy a car. You will thank me later. Oh, and my first car? It was a red 1990 Plymouth Sundance. It was a P.O.S.

3 thoughts on “How much car can you afford and how long should your loan be?

  1. I was under the impression that there was a 30-day (or some finite period of time) span where inquires from the same type of businesses only counted as one against your credit. I think my mortgage guy told me this. Am I totally wrong?

  2. I was under the same impressions as Jeremy….that as long as you are “shopping” for the same item (like a car) you won’t get dinged just because you are comparison shopping.

    On another note, I don’t know of many 16 year olds these days that are paraded around a car lot with a budget of $8,000 in TODAY’S dollars. Your parents were very generous with you. Yet, you are the same person that preaches that you must SAVE FOR YOUR OWN RETIREMENT and not help your parents if they should now find themselves in circumstances beyond their control. It’s easy to give out that kind of advice when you’ve started out in the way upper-middle class or higher.

  3. When you say 15% of your take home. Does this include EVERYTHING related to the transportation category Payment, Insurance, Fuel, Maintenance, Matching Fuzzy Dice for the Mirror? Please provide details on what is included in that category. Thanks! By the way that Sundance would be BALLA status with some tint and spinner hub caps.

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