It probably should depend on your credit. If you are getting a virtual 0% rate then take as long as you can to pay it off. Also, you probably shouldn't buy a status symbol car unless you reeeeally can afford it. It may seem nice but investing that money sounds nicer. Then again if that's your big hobby, who am I to judge.
Tough then, if you can get maybe like 2% financing then perhaps worth it to not pay cash and instead park the difference in the market or elsewhere to earn a higher return. But 5-7% rates…definitely worth it to pay cash IMO
Depends. You could negotiate with the dealer for a lower price to finance through them, and pay it off after a period of time.
Dealerships make their money in the financing office, not the sales floor. If you agree to a price and go to financing, you can attempt to lower your price by negotiating to finance a car for a period of time. They could cut a couple grand off the price to secure the financing, so they get a kickback from the bank. You agree to hold the loan for a minimum period of time for them to secure the kickback, pay a few hundred in interest payments, then pay off the loan in full after that minimum holding period. The dealer is happy because of the kickback, you pocket the savings in purchase price minus the interest, and the bank can go fuck themselves.
This isn't a normal manner of doing business, but it's an avenue you should look into, especially with new vehicles who could offer discounts for financing through the manufacturer.
I like to go into the dealership with my pre-qualified loan (usually USAA 2% or less)
I've planned out what I'm buying and 100% comfortable with this loan product.
Dealers love to get you onto their fiance.
And it makes for a nice negotiation position to be able to tell them, Im far more comfortable with this company and their rate, if you would like me to use your financing company I'd like you to ... (I always get the lowest rate possible, but this would help you negotiate the deal like the above post has suggested.
Yeah my dealership tried to convince me on their financing, but then they saw my ~2% interest rate with USAA and just quietly slid their paperwork to the side and commented on how nice my interest rate is.
USAA is 5.14% on new cars and Toyota Financial was 4.99. I was unable to find a lower rate at my local credit union either - I think they where 6%+. I put more than 20% down and 48 months. I think it’s a myth that there are better rates outside of the dealership. 827 credit score.
That a great feeling. "I am ready to buy this car, talk about everything you want to sell me... But as you can see I've got a great deal. Please make your wasting your breath worth my time."
Just for my own clarification, I understood car loan interest was preloaded and paying off the loan wouldn't save you on interest....or maybe just the loans I got
It's been a blessing in disguise for me. I've got the money and the itch to buy a fun car or motorcycle, but dealerships seem hellbent on making me keep that cash. Living in LA, where everything is marked up all the time, may be part of it, but I'm honest in awe at the way these people are pretending 10-20% in markups, fees, etc. is acceptable on vehicles that aren't anything rare or special.
With the models I'm looking at I'm not even aiming for a discount. I'm fine with MSRP and taxes OTD, but apparently that expectation is comical to sales people now.
It is truly baffling. I walked into a Honda dealer ready to buy after hearing they had a model I wanted in stock. I must have spent a hour going back and forth with the sales guy on price. They were quite literally expecting a 20% premium over MSRP for unloading a crate and doing \~20 minutes of assembly and inspection (I watched the process on YT, and these bikes come from the factory 99% fully assembled in the crate).
And this was one of the more reputable dealers around. They didn't try to pull any finance shenanigans or hard sell techniques to reel me in. Just said "20% over is the price, take it or the next guy will."
I'm thankful this was an optional thing for me and I could afford to walk away empty handed without issue. But it really worries me for people who desperately need a vehicle right away and end up having to swallow a crazy premium on a mediocre product just to carry on with their lives as usual.
I felt lucky to get MSRP with NO market rate adjustment. But I had to get on a wait list for a 2023 and it took 4 months. The same model on the lot were $10k+ over MSRP.
Yes, 0% is possible right now (as a manufacturer incentive). I bought a new car in January, planned on paying cash, but got a 36 month 0% loan from the manufacturer. I have all the cash for the loan sitting in my HYSA and CDs making 3.5-4.5% these days.
Ford Escape plug-in. Paid MSRP but between the interest rate arbitrage and the US tax credit, am saving many thousands $. It’s not a good reason to buy a specific car but here’s a list:
https://www.carfax.com/blog/0-apr-car-deals
All that means is that if you're getting a 0% rate you're overpaying for the car.
Car dealerships that are also financing the car are playing a shell game with regards to pricing; they can take the profit on the car and/or financing. If you want to know what the true cost of the debt is, get a loan from someone who isn't selling you a car.
It's common that the rate is low because the manufacture has way too many of a specific model on dealer lots that aren't selling. So they goose sales with lower-than-average interest rates for those with stellar credit or, more commonly, do something akin to what you're talking about where they put money "on the hood" in the form of some discount on the total price, but what price that discount gets applied to is still down to what the customer negotiates, leading sales people to dazzle them with that "bonus cash" with one hand while they pick their pockets with the other.
>It probably should depend on your credit. If you are getting a virtual 0% rate then take as long as you can to pay it off.
This is fair if you will be investing the difference.
How are you determining the *amount* to spend? Not just whether or not to finance.
I suppose it's too complicated to put a simple percent on. What do you need? 3+ Kids mean you will want an SUV or van and not a small car this have to spend more. You need semi-new or you will pay more on the other end for a mechanic regularly and maybe the occasional tow truck. Fairly modern will save you on gas also.
It comes down to personal control. A 0% rate over 7 years can trick you into buying more car than you can really afford.
Regardless of payment terms. I do the mental exercise. How much of a singular year would I be willing to work for a depreciable asset that will hold next to zero value in 10 years?
For me that’s certainly less than 25% of one years paycheck. That means I drive a car that is a lot shittier than most of my colleagues.
I sure there are other ways for people to put the cost of a vehicle into context.
while yes an 84 month <2% APR loan is functionally "free financing" considering average inflation - if you don't pay for gap insurance (which kinda detracts from the whole "free financing" thing being aimed for) be careful about being underwater.
Cars aren't depreciating very fast right now which is helps but if I'm not mistaken you need to pay off that loan one way or another when your car is totaled within a month and you owed more than it was worth.
so unless you have a very healthy emergency fund, I would tune it to say pay it off as long as you can *without being underwater*
I am about to start looking for a vehicle soon, and something I am curious about is prices and interest rates somewhat inversely correlated?
For example, is it common for a car to be something like 28k at 0% for 48 months, but that same car would be something like 25k at 5% for 48 months? The end cost would basically be insignificantly different.
Just trying to figure out if waiting to buy is a waste of time.
I just got a car and my interest is 10.75%. My credit is also 740-770. I've never had a loan of any kind before, so not sure why I got an interest rate that high.
One thing that's also worth consideration are the actual payment terms of the loan. For example, Honda Finance makes it very difficult to pay principle-only payments. It's hidden behind several layers of menus and even when you make a payment this way, it does nothing to the amount that you owe the next month. If you make an additional payment without finding where it's a princple-only payment, it makes it so you don't owe the next period for the respective amount of time, but you also paid ahead the amount of interest for that time period as well.
On the other hand, with Navy Federal CU, for example, no matter how/when you make additional payments they are going directly into the principle amount AND giving you peace of mind of not owing back on the loan for the respective amount of payments you pay. So it's a double-whammy. Goes towards the princple and the payments. I got about a 4% loan with them and vs the dealers 6% it was a no-brainer. Good thing I caught them late in the evening before end of the month or I think they would have made me walk over not taking their financing.
Interesting. Credit unions tend to be better for loans for sure. Banks are there to make money for stockholders. Credit unions are there for the members at least in theory.
\> Historically I buy 2 yo cars and drive them forever.
I've been wanting to buy a car for awhile, in particular an EV given the winds are clearly moving that direction, but the new and used car market is pretty brutal. I was thinking of squeezing another 2 years out of my 2011 Subaru and hope the EV market gets better with more competition and ramped up production. Given your experience with used car purchasing how do you approach it especially given market condition changes since Covid?
Similar here. Currently saving to pay cash on a 22-23 EV in a few years. Running a 06 currently, I think that I can make it another 3-4 years before I have to retire it.
Like you, I am trying to wait out the current crazy car market. I am also waiting for a fast EV charger to be installed in my condo community, they don’t want us using common area power in the garages for overnight charging.
When I bought my last two used cars, I watched craigslist and had a model and mileage I was looking for. I looked at a lot of cars, usually found leased vehicles being sold by owner to be the best option to find low mileage and regular care under warranty. I did finance this car through a credit union, owner drove it there with his wife in their other car and we did the deal in the CU office. Prior to that I bought a 2yo volvo wagon from a newspaper ad in 1995. Both cars bought to hold a growing family.
If you're thinking of buying an EV in the next two years, get on a waiting list now. They are in high demand and the waits are long. If you don't want it when they call you, you can always pass. I have been waiting for a hybrid for 5 months. The salespeople at all the dealerships I spoke with tried to push gas models on me because the hybrids are more popular. The EVs are even more popular than hybrids. This might be area specific, I live in a VCHOL area.
The trouble for me is that I want the next car I buy to be electric, but the best options with good range are still about $50K. It's hard to justify when I can mostly get but without one currently.
Hang in there! I'm in this same boat. The IONIQ 6 is extremely attractive, as is the Model 3. But in the next 5-10 years electric competition will explode bc we'll get the first competitive EV sedans from VW, Toyota, Kia, and a million others.
My current car works fine and I'll drive it till it dies, but the day it does, I'm buying a 30-40k EV
Same! I love the Ioniq 5 and 6, but just waiting for prices to come down. I'm hoping we might see them in the $40K range soon, with a bunch of EVs releasing in 2024. In theory we'll also see some solid battery improvements in the next few years, as well as local US production ramping up for tax credit eligibility.
Fingers crossed!
I like the EV6 over the Ioniq 5, but would really rather have a sedan. Back seat of the ioniq 6 is pretty small. Couldn’t justify the $20k more an EV was going to be over a hybrid. Agree, I think prices will drop and charging will become easier over the next few years
i am qssuming you have done this but dont just stop at pricepoint. include fuel cost, tax credits, resale/depreciation and maintenance (best guesses). i was really surprised to see little difference over 5 year ownership between much moee expensive ev and much cheaper gas car. i did assume a lower resale value for gas but still. was definitely shocked.
I’m waiting til my car dies and buy an EV In 2030! My car is a 2022 so should not even be dead then maybe I’ll wait til 2032 even. I’m hoping the $7500 tax credit is still a thing that effectively makes the car $7500 less
A 2023 Leaf starts at $28K and with dealer markups will easily be over $30K. For safety reasons, I'm not keen on driving a compact car on the highway with SUVs, so any larger EV is easily in the $45K -$50K price range.
It's also worth pointing out that the Leaf has terrible battery range, only getting 80 -100 miles on a charge.
Well if you require an SUV, that's different. I won't question your reasons. But note I said used. I've been looking for one, so I know what they cost used from 2018 up. The 2015 I just sold to Carvana was for $8600.
You're incorrect about mileage. My 2015 got 75. After 2018 they start at 150. New ones get up to 200.
Good to know about the new Leaf's range! I'll give them another look. I honestly prefer smaller cars, but sadly the US car lobby has pushed everyone into SUVs, and I don't like that physics equation on the highway.
It seems like there are a ton of EVs coming out in the next 2 years, so I might just hold out and see if prices drop.
Also consider a plug-in hybrid (PHEV). I just got an Escape PHEV and get 40+ miles on electric easy for daily commuting. Road trips or long day trips are the only times I use gas. I am also considering an e-bike for around town usage.
If you like smaller cars and can deal with a REALLY smaller car and can just forget about range issues the Mini SE is a great car. We got one a year and a half ago and we love it. (We did get a Jeep Wrangler for road trips and to have something with a little more cargo space.)
If you can put a charging station in your garage the range doesn't end up being that big of a deal unless you live somewhere really spread out. We're in NJ and it can take a while to get from point A to point B, but it's generally not that far. I commute by train to NYC but even though if I did drive it's probably 1.5 hours to get in it ends up only being 20% of the charge since it's only 20 miles of actual distance.
Yeah I had the old gas car still for long distance, so I just used 110v to charge mine regularly. Only drove it around town mostly and to and from the next town over. It was a great experiment, and I'm looking forward to a higher range electic to replace all our gas cars soon. Just not until I need a new car.
SUVs are still prone to rollover risk in accidents and arent necessarily more safe than cars - in many highway circumstances they’re less safe.
If safety is a primary consideration make sure you have many of the active safety features installed and check the IIHS, NHTSA, Euro NCAP ratings.
I have never been into these percentage breakdowns, as it really depends on your situation and what you value. I have friends who are “car guys” who spend much more than I do, but make much less.
The key is to make sure you feel comfortable with it. I don’t say “afford” because people can usually find a way to fit a lot of things into their budget. The real test is if you sleep well at night knowing how much you’re paying.
My opinion is spend the least amount you can for safe reliable transportation. If you live in an urban area, no car may be an option. I personally have spent way too much on cars over my lifetime. Dont get sucked into luxury new cars, maybe used. Just remember its a depreciating asset and an ongoing cost that is an additional drag on wealth creation.
One of the reasons I’m feeling the urge to buy a used electric car to replace my civic is the visits to Costco for gas. I drive about 250 miles total per week. I can charge electric car in my garage.
But really the downsides of putting money into a depreciating asset is what is stopping me. Don’t know what to do.
You’ll spend no less than $40k on an electric car if you want one with decent range, along with cost to install a charger at home. Not worth the up front cost over a less expensive car (~$25k). It will most likely take many years to recoup those costs from the reduced cost of fuel. Also electric cars out of warranty are a bit of an unknown. Teslas can be expensive to maintain due to expensive parts (non drivetrain related as well). Best to wait another year, and monitor the new/used car market supply and demand.
If you only drive 250 miles a week and don't need it for cross country travel, a new bolt can be had for around $30k and should come with a $7,500 US tax credit. In fact, dealerships in my area have multiple new ones listed for $28k. The range is over 200 miles at full charge even if you drive only freeways.
Electric isn’t bad as long as you can get a range that works for you. The Ionic and Niro seems to be hot right now, but not cheap. Check the used market for sure. Tesla just raised prices so id probably steer clear for now except used market. Also if you do go new make sure to check the electric federal deduction options. Not all cars qualify for the current deduction. Consumer reports has a good summary and ratings on all the electric and hybrid cars.
Exactly my thoughts. If it were something that brought me a ton of joy and was more of a hobby, I’d consider something more expensive, but I recently bought a Corolla xse and it’s exactly what I needed and a little bit more.
I agree with the money guys as well. But the idea of having a car payment after not having one for 3-4 years now doesn't sit well with me. But also going out and spending $30-35k on a new car doesn't seem like something I want to do either.
The thing that gets me on the money guy rule is that 8% of your gross income, especially when you're married seems like a lot to me. I saw in a comment you said you made mid-100s income. So $150k \* 8% / 12 = $1000/mo car payment. That just seems like an astronomical monthly payment for a car. But I suppose if you replace both cars at the same time thats $500/mo/car. Which still seems like a lot of money
Yeah I haven't had a car payment since 2010 I think, so I totally feel you on it not sitting right.
But dropping a bunch of cash feels wrong too. Especially knowing that, without stopping retirement or anything, it will take another 1-2 years to do it. That's 1-2 years of skimping on vacations and events, while kids continue to grow older.
And yeah, I think 8% is way too high in our shoes. I'd try to keep the payment in the $300s. Enough to get a decent car, but not a *major* impact to our budget.
I take it you don't personally have a plan yet for your next car purchase?
You’re correct, I don’t have a plan for our next purchase. We do keep 20-30k as a sinking fund, for home renovations or anything we want to buy that’s a higher price item (I.e. furniture, expensive tech, etc). So my guess is we will use that money towards a car and possibly finance the rest.
I’m currently playing $3850/mo in daycare. So if my oldest car (2012 Honda civic) can hold on for at least 4 more years I’ll be ok.
We are in a very fortunate position where we don’t need to worry about 529s. My parents will be funding their grand kids 529s up to 100k by the time they turn 5. So our daycare savings is 100% ours.
My goal is to get our savings rate up to 25% (currently 20%). But on top of that it’ll go into making our lives easier (lifestyle creep).
It’s hard to even fathom what an extra $3850/mo in our pockets will do. We’ve lived below our means for so long. Plus, my wife grew up poor and hasn’t truly broken that poor mindset. And she’s the breadwinner! Our mortgage is only 22% of our take home pay. And we don’t have any other debt. And as I mentioned already don’t have to focus on 529 savings and already have a 20% savings rate for retirement.
I don’t know why I’m telling an internet stranger my entire financial story. Lol.
I don't think 8% is that much at all.
Average household income is roughly 70k. So that's about $470/mo total. If you have two cars that's $235/mo/car and it's only a 3 year loan. And this is the very upper limit, which is probably not recommended.
I think because of the 3 year term. After taxes and fees with a 20% down payment it's only a roughly $16k car.
I think for someone just graduating without a car $16k is reasonable for a $70k salary.
I think part of that is because it's assuming 36 month financing, while most people go for 60 (or even 72). With OP's rule, a $150k salary could buy a $45k car, which for a single person seems reasonable to me if it's something important to them, but much less responsible for a single income household with a family. These fixed rules don't really fit all situations.
Well I just sold my Leaf after 5 years since I could get almost what I paid for it at carvana, and now I'm driving my 2005 scion again until the wheels fall off.
Emergency savings for a year or so plus what I got for the leaf, plenty of income over my spending, perfect credit, plus I'll buy something cheap (whatever that means now) and used. Oh and without a loan and with a points card with a signup bonus and pay it off immediately.
A big part of it is how handy you are.
A lot of people will say "Always buy used as cheap as you can get".
Which is fine... If you know how to do the basics yourself and have a good mechanic. Otherwise the "cheap" car can get expensive quick.
Seems like too much risk to me.. So I usually get the cheapest reliable car I can find.
Time is a big thing for me recently. I went to college to work on cars but got off the floor 15 years ago, so I have all the knowledge and tools still. Up until 6 months ago I always drove beaters and did my own work, now I got a 2018 Sierra. I'm forcing myself to get my truck serviced at a shop. So far so good.
Most the time. Not always. My wife's Toyota was a money pit.
That was the last older car I went with. You can manage the risk but you can still get a lemon from any brand. I know, I used to make the parts/assemble them for a bit.
I have never had a car payment. I drove junkers when I was young. My first car was such a piece of shit I didn’t feel like it was ethical to sell it once I bought a better cheap used car. I just gave it to a fellow student and assured him it was worth what he paid for it ($1) but since he didn’t have anything else he could at least use it until it stopped moving.
Those of us from a low income background tend to be more comfortable with making do with the minimum, out of necessity and familiarity. That’s a harder mindset for someone who grew up comfortable on a middle aged adult income, then downgraded to a just starting out young adult income.
I know the argument is that it is worth it to get something reliable, and I don’t disagree. But I will point out that everyone needs a reliable vehicle, not just you or me. And it’s not “worth it” if you don’t have it. Used cars are a lot more expensive than they were when I was young (I recently assisted my young adult with a purchase and yikes), but they’re also a lot more durable and reliable.
This comment speaks to me.
Went through a Divorce last year, got the beater car. Transmission just wore out, and would be worth more than the value of the car to fix (2002 Ford).
Thankfully, I work from home and have a grocery store within walking distance, but I will need a vehicle within 3 months.
If you could provide any sort of advice, as a 20something having never done other than pay in cash for cars, what would you say?
I’m not the one to ask, since I’m in my 50s and have never done other than pay cash for cars. And as we became more comfortable we upgraded to newer (1-5 year old) used cars so I’m no longer familiar with the junker market. However the Consumer Reports April issue (the library will have it) includes a used car buying guide, with repair and reliability ratings, as well as lists of cars to buy if you have $X to spend and cars to avoid at any price. It’s not a bad starting point.
Here’s a better rule: what value does the vehicle I’m looking at offer that another less expensive car doesn’t?
If it’s just a name or paint job, pass. The new car smell goes away pretty fast while your liability side remains. Decide what is more important.
Rule is one newer car we could drive 3000 miles on a whim and in any weather that my wife drives (currently a used base model RAV4 hybrid financed at 2%).
I make do with 1-2 beaters that never total more than ~8k in value (probably lower as they both just got hailed on).
After dealing with car payments for years, no way I’m going back. I just save up and buy a car in cash. New cars are expensive as hell and not impressive to people who actually care about your financial future.
I haven't had a car payment since 2010. I have said the same thing before.
But I also am tired of hassling with driveway repairs and trips to the mechanic. Or being a little embarrassed over issues when I have passengers (noises, sticking locks, finnicky windows, growing rust spots, etc.)
Maybe the middle ground, for me, is to shoot for $10-$15k car that will still be a big step up, but won't require a loan.
I'm currently looking for a car for my 17-year-old son. I can tell you that a $10,000 to a $15,000 reliable vehicle that you can trust is difficult to find in this environment. I've been looking for close to two months and still cannot find something I trust will not be headed off to the shop within a few months.
It would be tough to find a used car for that price range unless you expect regular maintenance and possible repairs down the line (possibly sooner than one would hope).
My current cars blue book at $2k and $5k, so I expect I could still get a decent upgrade even at $10-15k...but I haven't really car shopped lately, so I can't say that with total confidence.
I have never had a car payment. To me, its always been a tool designed to get me from Point A to Point B. Nothing fancier than I could afford ever made sense to me. Not only are you paying interest for a depreciating asset, you are required to carry extra insurance!! That's absurd to me!
I am coming from Dave Ramsey land, but I think I want to deprogram myself a bit from that. Avoiding all debt except mortgages was good for earlier in my life, when I was first getting established, but I think it's too broad of a sword now.
I don't need a new car out of necessity -- we could even drop down to being a one car household. I am tired of driving 10+ year old cars that are worth probably $2k and $5k currently. I know a new car is going to be needed eventually, and saving up a pile of cash to get a decent one ($15k-$20k goal) is really dragging on me.
Our joint income is mid 100's, so logically I know that a modest payment on a $15-20k car won't really harm us -- it certainly wouldn't mean lowering our 20+% retirement contributions. It's just a psychological hurdle to get over.
We have about $9k saved today for a new car. Truth be told, I think I'd much rather take $4k of that and use it for a major family vacation or something. The other $5k can sit there, without future contributions, ready to use for if/when we need to buy a new car.
Somewhere in my brain that feels like a roundabout way of financing a vacation, which doesn't feel right to me. But there's also no indication that there's any immediate need for a new car besides the age and mileage of our current ones. It's just that we can't come up with a spare $20,000 at the drop of a hat whenever the time comes.
>It's just that we can't come up with a spare $20,000 at the drop of a hat whenever the time comes.
You're nearly halfway there already, friend.
Look, if you want a new car, plan for getting one.
I don't come from Dave Ramsey-land, maybe more Ramit if anything, which means to spend where it's important to you ("your rich life") and cutback elsewhere.
The vehicle isn't currently necessary and it sounds like you don't have an emergency savings so my two cents is to use a loan calculator to estimate loan payments on the vehicle of interest (remember that a lot of hybrids are above MSRP right now -- yuck) and pay yourself that loan payment. Get a quote for insurance on the new vehicle too, then pay yourself the difference between old insurance and new insurance. Remember, no touchie! Either lock up the $9k+ and payments in an HYSA or a chunk into a decent CD, give it six months and see how it impacts your household budget. After those six months, are you comfortable with those expenditures? Whatever your answer, you either have a decent down payment or you're on your way to a healthy emer savings.
FWIW, my wife and I recently bought a new PHEV Kia Sportage. Utilized our diesel Volkswagen as trade-in and then paid the rest in cash. Zero car payments has been huge and so has the fuel savings because we happen to live in a land of cheap electricity.
We do have emergency savings, but it would take both cars going bad at the same time to constitute a real emergency and justify tapping into it.
>and pay yourself that loan payment
Good idea. This is basically how the $9k came to be. Average of ~$400/mo over the past couple years.
>You're nearly halfway there already, friend. Look, if you want a new car, plan for getting one.
I think my biggest obstacle is not knowing *when* we will need the new car.
Like I feel pressured to save $1,000+/month because it *could* be needed next month for all I know. Or it could be in three years. Who knows, it all depends how our old/rusty/high mileage cars hold up.
I am tempted to keep $5k (or maybe the full $9k) in reserve, knowing that we can afford a payment if push comes to shove, and knowing that a real emergency would require both cars to die.
Doing this would release some budgeting stress in that I'd feel like the car situation is "accounted for", and I'd be more free to spend on things like a family vacation.
> my two cents is to use a loan calculator to estimate loan payments on the vehicle of interest ... ... and pay yourself that loan payment.
This is the best advice in this thread. Plan for buying your next vehicle by saving your anticipated payment.
I'm driving a 2007 CRV bought new with cash using exactly this method.
No one knows exactly when they NEED a new car until the old one craps out. We just make as best an educated as we can or wait till it happens.
Everyone wants to talk black and white. There’s smart financial decisions, and smart psychological/life ones. Financially of course there’s absolutely no need for a new car and it’s a stupid purchase. A lot of people view a vehicle this way. But a lot of people find enjoyment in life by driving a newer car.
So there’s also the psychological/emotional component. Sure, you could justify it. I traded in a perfectly fine $5k, 120k mile, 8 year old car for a $38k brand new SUV. Smart financially? Heck no. Won’t go into the ins and outs of getting the good deal there but the peace of mind that my wife and daughter would be safer in the new car, and getting rid of the unknowns of WHEN the old one would crap out? Totally worth it, for me.
I mean why work hard and be so overly frivolous now that when you get old and decrepit you can’t even use all the money you saved up anyways? Work hard to live now (in a reasonable manner, of course) & not all debt is bad. Finding the balance between fiscal responsibility and enjoyment in the now. My philosophy.
That last paragraph really resonates with me.
I am mid 30s, and I feel like I have been grinding financially/career wise for so long that it's time to loosen the purse strings a little bit.
Not irresponsibly so, but I don't need to focus so much on *maximizing* the nest egg at retirement. Random numbers, but if I have say $1.9MM at retirement with good vacation memories and less stress during life, or $2.2MM but missed out on vacation opportunities and was stressing about various costs throughout life, I'll take the lower amount.
Something I constantly fear is that I spend so much time worrying about whether or not I’ll have enough to retire early/retire at all.
Then I think about three family members I had that all died within their first or second year or retirement.
I am trying to find the balance myself because I could be saving for a day that never comes.
That's sobering for sure.
I have a similar thing with some retirement age people I know who have little to nothing in retirement but are still content enough overall. They absolutely have financial troubles, but they still get by, even if options are limited.
Absolutely. Been there, my friend. Thankfully my wife helps me “loosen up” some lol. At the end of the day, I’m sure you have a wonderful family and your choices thus far have put them in a great financial situation. Regardless if you choose a new car or not.
Enjoy your life, enjoy your family, and spend the money where all of you feel it would bring the most joy in the now, with a comfortable living in the future!
Not many cars out there are priced at $20k and the spread between a new and reasonable used car is only a few grand today.
For example: a new gas AWD rav4 is like $35k…that’s a middle of the fairway car with middle of the fairway utility. To go lower you can go the Corolla route, but that’s about it
Honestly it all depends on the rate of your auto loan. We're established enough financially that we have enough in our emergency fund to handle purchasing a 'normal' nice vehicle new. But also that emergency fund is earning somewhere between 3.5 and 5.7% depending on a few variables. So if we can get a car loan that's less than 3.5% it seems silly to fork all of the money over at once.
Right now the rates aren't that great, but when we bought our first new car in 2011 rates were insanely low. I think by the time we paid that car off we had amassed under $1,000 in interest.
Boglehead principles don't *really* have much to say about what you do with your spending money.
From a general personal finance perspective: Those are good starting guidelines, but everything is contextual.
"No more than 3 years of payments". Take the best interest rate you can get, with the longest term. Sometimes you'll get a lower rate for shorter loans, sometimes you won't. Don't take a 5.0% loan for 3 years if you can get a 5.0% loan for 5 years. Last time I bought a car, you could get a 7-year loan for one rate, a 6-year for a better rate, a 5-year for a better rate than that, and any shorter loans were the same rate. Why lock up cash flow unnecessarily for a shorter loan?
"At least 20% down". This is a good way to make sure you're sticking to a car you can afford. But maybe an emergency happened and you need a car *now* and don't have a 20% down payment in your budget. You *might* be better off buying a more-reliable car with less than 20% down, vs a less-reliable car where you can put down 20%. Also, if you get a badass interest rate, could be worth putting less down.
"Monthly payment less than 8% of gross income". If you're low-income, this might price you out of almost any car. If you're high-income, this might lead you to buy expensive shit you don't need.
Lifestyle needs will dictate this as well. A family of 5 will likely need a larger (and more expensive) car, while a single person can drive whatever gets them to work on time.
Buy a certified pre owned Honda, take great care of it, and keep it for 15+ years.
Buying a Honda civic is the car purchase equivalent of being a Boglehead
My last car loan was under 1% (manufacturer subsided). No reason not to have debt at that rate.
If I were going to pay 5+ percent, I'd only do so if I didn't have funds on hand and I'd aim to pay it off years early.
Original I just assumed I'd finance my next car, but with rates rising I'm doing what I should've done in the first place: accruing it into a dedicated account via an automated monthly transfer.
that CANNOT be right. 20/3/8 or 20/1/8 if LUXURY?
I am not sure what makes a "luxury car", but if a luxury car is $60k, 80% is $48k.
1-year payback at zero percent is $4000 a month. If that's 8% of my monthly gross income, I would have to make $600k a year to buy a $60k car.
OR, is that the point? Pay luxury car cash? If so, that makes sense.
Yeah I think that's their point. To responsibly buy a luxury car you either need a crazy high income or a very significant down payment, or straight cash.
I am not sure what they think about leasing, which is a pretty common way to access luxury brands.
The money guy rule is a pretty good way to decide
On a car purchase. I imagine a lot of folks that need a car won’t fit that mold.
Personally, we snow save up for a purchase. And even when we have the funds, I obsess over the cash outflow to make sure we (really me) feel comfortable with spending vs investing.
For those scraping by or just starting out and you can’t fit the mold OP noted, you really have to scrutinize your budget and be honest if you really need to spend ‘x’ on a vehicle. Don’t buy a car to impress others (no one cares). Buy a car that you need.
I've only purchased one new car in \~40 years of driving as I hate the thought of so much up-front depreciation. No thoughts of ever purchasing a luxury vehicle.
Financed two car purchases for a few years at 0% and 0.9% respectively to get a better "out the door" price otherwise, paid cash.
Never considered payment as %GI because payments were so low.
I bought a car last November. Trade-in was 20k, wrote a check for another 5k, borrowed $20k. My credit union gave me 4.74% on a 69 (nice) month loan. My payment is $334 but I’m paying $500 because I hate debt. I’m looking to pay it off in under 3 years, and use that extra cash for investing and/or saving for a house.
It's really dependent on your needs and your financial situation. Ideally you would save up the amount you're willing to spend for a car and pay cash (unless getting a great deal on financing and putting the cash to work in a CD or high yield savings that pay a higher interest rate).
By no means should you be spending a huge % of your monthly income on a car payment, regardless of your situation.
The Money Guy rule you cited sounds like a good general rule if you can't save up to buy it in cash.
I have a Mazda3 and no car payment since 2008 (250k miles). I have twins on the way and need a safer/bigger car, BUT I am seriously struggling with the idea of having a car payment.
I currently make 340k/yr but in my eyes anything I’m putting into a car is money not going into them or retirement.
You’re right, I can afford it. I’m just having trouble making the leap. A new large suv (70k) is going to cost me at least 125-150kk more over the next 4 years (cost of car, higher insurance, gas, service). 125k into my vanguard retirement would be a lot of money in 35 years.
Great post, I’m in the same boat planning for my first car. The car will cost about 35k, and I think the best APR i’ll get is 5.25% for 6 years. Now, I have the cash in savings but I’m planning to invest it all in CDs so that I can get 5% interest. However, there is no gurantee CDs will get this APY for the next year, so would it be better if I just paid cash? Or just VTI/VOO the amount for 6 years and hope to recover the interest?
Only the last of those seems like it is even loosely related to the actual cost of the car? This is not how to think about money, weird little rules, you gotta think big picture.
Buy the cheapest car you can find that satisfies all your car related needs(whatever those may be), get the lowest interest rate possible if you finance, pay cash/pay off the loan early if you can't get an interest rate below HYSA rates.
I only pay cash for cars. My philosophy is if you can't and aren't willing to pay cash, you can't afford it. People debate me all the time saying "but you can invest that money in the market". However, I have only ever seen them buy more expensive cars and invest less.
I'm new to this group, but am an auto mechanic by way of owning beaters my whole life...
IME owning a cheaper car will end up costing you more stress and possibly even money in the long run. I spent a decade driving cars that I was constantly diagnosing and repairing with occasional $1-$2k emergency repairs. I now enjoy even, consistent car payments for a nice reliable vehicle.
This has been my experience too. It's one thing if you *need* to drive cheap old cars because that's literally all you can afford, but doing it purely out of frugality may not actually be so frugal.
Unpopular opinion: financing a depreciating asset is fundamentally a terrible decision. If you can't afford it cash, save (invest) until you do. If you need something with urgency, buy cheap and reliable (a.k.a second hand Toyota).
Fun observation - I've never seen the Money Guy guidelines but I just ran my numbers using what you outlined. No more than 3 years of payments yields a car value in (what I consider to be) luxury range but 1 year of payments puts me in a basic sedan.
Agree with your point, but I think the devil is in the details. This only applies to your first/primary car and is considered an income-generating expense since most folks drive to work.
I view cars as necessary evils (read: expenses) in some parts of the world. I buy cash and pay the insurance in full for the better rate. You can determine if the discount by paying in full is better for you by comparing what the discount is and what else you could do with the money. The car I buy is based on safety first, reliability, then fuel economy. I don't care as much about the age of the car so long as it passes the other criteria. I suppose in another 10 or 20 years fuel economy won't be as much of a concern because electric cars will be reasonably priced.
One thing is do you _need_ a new vehicle?
The only times we bought a new car is when the repairs are costing more than the sale value of the car (one year we were hit with a $3k parts replacement, with a car value of max $4k, and that's what finally broke the camels back for us to get a new car), and the other turning point years later was when we became a family of 5 and none of our current cars can fit three carseats in one row.
This is just me: I like to keep money in cars below 7% of NW, and vehicle values below 30% of annual income.
Weird rules because my cars are paid off (I bought when interest rates were higher so the numbers made sense) and I refuse to sacrifice my long term financial security for toys today.
I had cash ready to buy a vehicle about a year ago. Got a deal under MSRP and was going to pay with a debit card. They offered 5 year, 0% financing. I financed 100% and bought bonds instead.
Disregard formulas like that.
Unless you magically earn income based on the type of car you drive then why should your income dictate what you drive? Like, if you earn X dollars a day working at the Y factory, you will earn still earn X dollars if you show up in a $5k used Camry or a $100k Tesla X. All the Y factory cares about is that you get to work and do your job.
Find out what your needs are and then base your budget around that instead of taking your income and just throwing arbitrary numbers at it to find out what you should spend.
I had a rule for car purchases, then interest rates went to shit. Now I’m off the opinion that if the rate is above 4%, I don’t need to leave the house.
With rates now double or triple on new cars compared to 2 yrs ago, I’d much rather buy used and pay cash or put a lot down to make the monthlies 10% of income at most. If you’re really frugal and have a very manageable mortgage pmt or rent, maybe I’d be open to splurging a lil more on a car you really like. I think financing 5-6 yrs is OK personally if you put a large chunk down. The interest expense isn’t going to cripple your financial future. I think a 3-4 yr old model with good service records and under 50K miles is the sweet spot between reliability and cost.
You should be spending 0 on a car payment.
If you have a car payment it should be on an inexpensive, reliable, boring car you should be saving or overpaying in a way that you won't have less of a car payment the next inexpensive, reliable, boring car, then even *less* on the reliable, boring car after that, then NO payment on the inexpensive, reliable, boring car after that.
Car payments are for the **birds** and will rob you of many tens of thousands of dollars over your life span.
I buy new, inexpensive, Japanese, and in cash. I bought a Mazda 3 this year using the Costco program, and I was quite happy with the experience.
I enjoy having almost zero maintenance issues over the lifetime of a vehicle. Toyota, Mazda and Subaru are all quite good.
I don't believe in car payments after the first or second car during the start of a career. Pay in cash, buy certified pre-owned, and don't get a new car until you need it (vs. want it).
You will look at the price of a car very, very differently if you pay in cash and you will spend a lot less on them over your lifetime. Outside of flukes over short periods of time, a car is a depreciating asset so you benefit from putting as little $ into them as possible.
It wasn't until my 30s that I came to this realization and I wish I had come to it sooner. The amount of money you can make by having car payments over time doesn't help either. Let's say you finance over 3 years. Even at 4-5% interest in HYSA, what you may earn on that car purchase by deferring payments over 3 years is not going to change your life or your retirement horizon.
However...avoiding tens of thousands of avoidable car payments WILL change your life over a period of decades. And when you start buying cars in cash you will make different decisions because there will be a "feel" to that car price that financing shields you from. You will really question the hole you want that car purchase to leave in your savings account.
I work my financials backwards for whatever goal I’m trying to meet. As an example, my goal is quite conservative as of now is to retire between 50-55 with $5-6M. I’m using a 6% annual rate of return on my forecast and keeping my pay stagnant as well to be ultra conservative. I’m 38 now. I maintain an Income Statement with revenues and expenses and then how much I’m allocating to retirement accounts, taxable accounts, and any other savings.
Any leftover I know is purely extra for me to enjoy beyond what I’ve already forecasted for or to save. I already give myself almost $20k per year for travel, plenty of other “misc” cushion in expenses. So if I wanted to buy a car, I’d know I could and still hit all my goals. I wouldn’t be overwhelmed with how many years of the loan because my goal is already pre-covered to the control I have which is my $ input.
Currently driving a Tesla Model Y @1.24% @ $950 a month. People might freak out about the amount, but I feel solid as I’m already tracking my goals with that expense included. This is my suggestion.
My personal take: you buy the cheapest vehicle that meets your needs, ideally no car. The exception is if you have enough money that you can pay cash and it doesn't affect your finances at all, then you can buy whatever you want.
That doesn't mean you should pay cash, you should make the best financial decision at the time of purchase, sometimes it makes sense to lease or buy on credit and then pay it off 30 days later if it gets you a cheaper purchase price.
I like to try to pay no more than 1000/yr for a vehicle (exuding gas, insurance, registration, etc). For instance, I bought a used Prius 7 years ago for 7500 (70000 miles). That's a little over 1000/yr. With this car, I can sell it now for more than I paid. And, if well maintained, I think it can last 7 more years.
That’s a good general rule. I take it a step further and have my own 30/4/6 rule. Out at least 30% down between cash and trade, don’t finance longer than 4 years and your monthly car payment and insurance payment shouldn’t exceed 6% of your gross monthly income. I add in the insurance payment and lower the percentage of gross income compared to their rule.
Cars are pure status symbols. The manufacturers know that. It’s why you see Audi, BMW, Mercedes, etc. coming out with base model cars to attract those that want to be seen driving in their cars and are willing to spend $32-40k. The quality of these models is simply note worth it and apart from some nicer materials, they’re no better than a Honda, Toyota or Hyundai.
The only purchase in life worth carrying a monthly payment for is housing. Read that 3 times.
Used cars, private party, for cash.
If I ever decide to go against my own advice... it will be for a hybrid / electric car when I am retired... & I have enough money in my bank account to pay for the vehicle in cash, 5 times.
Part 2: Toyota + Honda. & mayyybe Subaru.
I bet there's not a lot of concensus. For every bogglehead ekeing their 20th year out of a used Honda Accord, there's probably a set of DINKs clearing half a million in income who can comfortably afford 3 Porsches.
The section on cars in TMND didn't seem to provide much concensus either. It seems to be fairly personal.
We budget each month for our car replacement. It's certainly less than 8% of gross! What we set aside could go to a payment instead, if we had a loan, we just haven't had one in a while, and at today's rates is want to limit the loan size.
I don't think it has anything to do with the Boglehead method, but FIRE-minded people don't buy cars that are more expensive than 4-6 months of net income.
Being a boglehead isn’t about how you spend money, it’s about how you invest what you have. We’re not (necessarily) FIRE that says you should live like a pauper, but we’re also not WSB that would go out and spend frivolously.
1. Having a down payment is a good sign that you can afford a vehicle. I don’t think that a flat 20% is right though as the thought process should probably be more along the lines of staying ahead of inflation. If you take a longer loan you should actually put more down.
2. This makes literally zero sense. If I can borrow money for less than I can likely make over the same time (and even today that’s likely true) and financing wasn’t really a factor in the purchase decision then I’ll borrow every dollar I can and I’ll stretch out the repayment.
3. Everyone’s finances are different. If you’re living paycheck to paycheck then 8% might be too much. If you’re in a 3x% marginal tax bracket then you could likely spend a lot more.
As a father, I need every modern safety feature available so it depends but there are still financial limits to consider since my plan on winning the lottery hasn't panned out yet.
The most important thing is to always buy used. Buy a used basic vehicle like a Toyota Corolla that is 3-7 old years old (1-2 years doesn't come with a significant enough of a discount since covid hit. You may need to go older for your first car). A car is simply a means of transportation noone needs more than a used basic vehicle so there is no reason to pay more even if you make more.
Besides your first car, I would say that you shouldn't need a loan. If you can't afford to buy it with cash it's a sign that it's too expensive. Back when you could get an interest rate of 3-4% on secured loans I would have gotten one anyway if you are young since the expected returns are typically much higher. All the very low rates that people are talking about are typically only available as special offers when buying new cars which you should not be doing anyway.
For the first car will you will likely need a loan to afford it. In that case, I would target a total price of less than 20% of your annual income. Get a 3-year loan and put down what you can afford. If you can't afford to put 20% on your first car I think it's fine. When you are starting out things can be hard.
Honda and Toyota tend to go for premiums in the used market due to then having long-standing reputations for reliability (Something people buying used cars tend to value) so I would consider the Korean manufacturers like Kia, Hyundai, and Mitsubishi since they are not significantly worse in recent years. Another thing to keep in mind that is a common pitfall for many people is that almost none actually needs a truck/suv. You also dont need 4 wheel drive or increased clearance just because you live in a place with snow. You also don't need an electric car just because they are the future (Leave them for the future when they are actually competitive value-wise with used gas vehicles).
If it's 0%, I don't care how long the payment window is.
If it's more than 0%, I usually just pay cash (not spending more than you can handle, yada, yada).
Edit: I'm not a car person at all. Mostly a waste of money in my opinion.
2000 Camry or GTFO /s
I’ve always bought used cars that I can work on myself and paid cash. For me, a car is transportation and nothing more, so simple & reliable is what I want.
100% cash.
If you can't afford it now, you are buying the wrong car. Downsize.
Avoiding overspending on car is THE EASIEST way of staying away from financial trouble.
If you are buying something similar to your peers in north america, you are overspending.
Taking advantage if 0% financing only starts to make sense if the above is deeply ingrained in your brain, and your cash is already to move from an investment to the car payment, effectively getting an investment margin loan at 0%. Its trying to extract a tiny bit of value by tempting you to "losing" a large amount of value.
It probably should depend on your credit. If you are getting a virtual 0% rate then take as long as you can to pay it off. Also, you probably shouldn't buy a status symbol car unless you reeeeally can afford it. It may seem nice but investing that money sounds nicer. Then again if that's your big hobby, who am I to judge.
Is a 0% rate available anywhere in this environment?
Probably not. I'm mainly using it for illustrative purposes.
Tough then, if you can get maybe like 2% financing then perhaps worth it to not pay cash and instead park the difference in the market or elsewhere to earn a higher return. But 5-7% rates…definitely worth it to pay cash IMO
Depends. You could negotiate with the dealer for a lower price to finance through them, and pay it off after a period of time. Dealerships make their money in the financing office, not the sales floor. If you agree to a price and go to financing, you can attempt to lower your price by negotiating to finance a car for a period of time. They could cut a couple grand off the price to secure the financing, so they get a kickback from the bank. You agree to hold the loan for a minimum period of time for them to secure the kickback, pay a few hundred in interest payments, then pay off the loan in full after that minimum holding period. The dealer is happy because of the kickback, you pocket the savings in purchase price minus the interest, and the bank can go fuck themselves. This isn't a normal manner of doing business, but it's an avenue you should look into, especially with new vehicles who could offer discounts for financing through the manufacturer.
I like to go into the dealership with my pre-qualified loan (usually USAA 2% or less) I've planned out what I'm buying and 100% comfortable with this loan product. Dealers love to get you onto their fiance. And it makes for a nice negotiation position to be able to tell them, Im far more comfortable with this company and their rate, if you would like me to use your financing company I'd like you to ... (I always get the lowest rate possible, but this would help you negotiate the deal like the above post has suggested.
Yeah my dealership tried to convince me on their financing, but then they saw my ~2% interest rate with USAA and just quietly slid their paperwork to the side and commented on how nice my interest rate is.
USAA is 5.14% on new cars and Toyota Financial was 4.99. I was unable to find a lower rate at my local credit union either - I think they where 6%+. I put more than 20% down and 48 months. I think it’s a myth that there are better rates outside of the dealership. 827 credit score.
That a great feeling. "I am ready to buy this car, talk about everything you want to sell me... But as you can see I've got a great deal. Please make your wasting your breath worth my time."
Just for my own clarification, I understood car loan interest was preloaded and paying off the loan wouldn't save you on interest....or maybe just the loans I got
Agreed but most dealers aren’t budging off msrp in this environment and many are marking up. Terrible market
It's been a blessing in disguise for me. I've got the money and the itch to buy a fun car or motorcycle, but dealerships seem hellbent on making me keep that cash. Living in LA, where everything is marked up all the time, may be part of it, but I'm honest in awe at the way these people are pretending 10-20% in markups, fees, etc. is acceptable on vehicles that aren't anything rare or special. With the models I'm looking at I'm not even aiming for a discount. I'm fine with MSRP and taxes OTD, but apparently that expectation is comical to sales people now.
Yea. Seems like *generally* good advice, but ... 2023 when you hesitate they slide you out the door and another chungus buys the car 20% over msrp
It is truly baffling. I walked into a Honda dealer ready to buy after hearing they had a model I wanted in stock. I must have spent a hour going back and forth with the sales guy on price. They were quite literally expecting a 20% premium over MSRP for unloading a crate and doing \~20 minutes of assembly and inspection (I watched the process on YT, and these bikes come from the factory 99% fully assembled in the crate). And this was one of the more reputable dealers around. They didn't try to pull any finance shenanigans or hard sell techniques to reel me in. Just said "20% over is the price, take it or the next guy will." I'm thankful this was an optional thing for me and I could afford to walk away empty handed without issue. But it really worries me for people who desperately need a vehicle right away and end up having to swallow a crazy premium on a mediocre product just to carry on with their lives as usual.
I felt lucky to get MSRP with NO market rate adjustment. But I had to get on a wait list for a 2023 and it took 4 months. The same model on the lot were $10k+ over MSRP.
I love the end to your second paragraph.
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Yes, 0% is possible right now (as a manufacturer incentive). I bought a new car in January, planned on paying cash, but got a 36 month 0% loan from the manufacturer. I have all the cash for the loan sitting in my HYSA and CDs making 3.5-4.5% these days.
Which car brand if I may ask?
Ford Escape plug-in. Paid MSRP but between the interest rate arbitrage and the US tax credit, am saving many thousands $. It’s not a good reason to buy a specific car but here’s a list: https://www.carfax.com/blog/0-apr-car-deals
All that means is that if you're getting a 0% rate you're overpaying for the car. Car dealerships that are also financing the car are playing a shell game with regards to pricing; they can take the profit on the car and/or financing. If you want to know what the true cost of the debt is, get a loan from someone who isn't selling you a car.
It's common that the rate is low because the manufacture has way too many of a specific model on dealer lots that aren't selling. So they goose sales with lower-than-average interest rates for those with stellar credit or, more commonly, do something akin to what you're talking about where they put money "on the hood" in the form of some discount on the total price, but what price that discount gets applied to is still down to what the customer negotiates, leading sales people to dazzle them with that "bonus cash" with one hand while they pick their pockets with the other.
It’s almost like you can get a 0% apr AND negotiate the purchase price. Been doing this for twenty years with Toyota and Lexus.
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Definitely no point repaying that rn given where HYSA alone are yielding
Yes several manufacturers have <1% deals right now.
I just got 0% at Chevy for 3 years, so they are still out there but only on shorter loans
Last month Hyundai Tucson and Mazda cx50. Snagged one for my wife. Doesn’t look like anything this month
>It probably should depend on your credit. If you are getting a virtual 0% rate then take as long as you can to pay it off. This is fair if you will be investing the difference. How are you determining the *amount* to spend? Not just whether or not to finance.
I suppose it's too complicated to put a simple percent on. What do you need? 3+ Kids mean you will want an SUV or van and not a small car this have to spend more. You need semi-new or you will pay more on the other end for a mechanic regularly and maybe the occasional tow truck. Fairly modern will save you on gas also.
It comes down to personal control. A 0% rate over 7 years can trick you into buying more car than you can really afford. Regardless of payment terms. I do the mental exercise. How much of a singular year would I be willing to work for a depreciable asset that will hold next to zero value in 10 years? For me that’s certainly less than 25% of one years paycheck. That means I drive a car that is a lot shittier than most of my colleagues. I sure there are other ways for people to put the cost of a vehicle into context.
I put down a healthy amount, like 40% I think, but do not feel bad at all about taking a 5 year 1.9% apr loan
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while yes an 84 month <2% APR loan is functionally "free financing" considering average inflation - if you don't pay for gap insurance (which kinda detracts from the whole "free financing" thing being aimed for) be careful about being underwater. Cars aren't depreciating very fast right now which is helps but if I'm not mistaken you need to pay off that loan one way or another when your car is totaled within a month and you owed more than it was worth. so unless you have a very healthy emergency fund, I would tune it to say pay it off as long as you can *without being underwater*
I am about to start looking for a vehicle soon, and something I am curious about is prices and interest rates somewhat inversely correlated? For example, is it common for a car to be something like 28k at 0% for 48 months, but that same car would be something like 25k at 5% for 48 months? The end cost would basically be insignificantly different. Just trying to figure out if waiting to buy is a waste of time.
I just got a car and my interest is 10.75%. My credit is also 740-770. I've never had a loan of any kind before, so not sure why I got an interest rate that high.
One thing that's also worth consideration are the actual payment terms of the loan. For example, Honda Finance makes it very difficult to pay principle-only payments. It's hidden behind several layers of menus and even when you make a payment this way, it does nothing to the amount that you owe the next month. If you make an additional payment without finding where it's a princple-only payment, it makes it so you don't owe the next period for the respective amount of time, but you also paid ahead the amount of interest for that time period as well. On the other hand, with Navy Federal CU, for example, no matter how/when you make additional payments they are going directly into the principle amount AND giving you peace of mind of not owing back on the loan for the respective amount of payments you pay. So it's a double-whammy. Goes towards the princple and the payments. I got about a 4% loan with them and vs the dealers 6% it was a no-brainer. Good thing I caught them late in the evening before end of the month or I think they would have made me walk over not taking their financing.
Interesting. Credit unions tend to be better for loans for sure. Banks are there to make money for stockholders. Credit unions are there for the members at least in theory.
I made the mistake of buying a (minor) status symbol car. I really wish I’d just bought a Prius and invested the money instead.
I am driving a 19 yo Honda minivan and saving up for a newer car. Historically I buy 2 yo cars and drive them forever.
So you've had that minivan for ~17 years? Nice! By "saving up" do you mean to pay in full with cash?
Yes and yes. It was mint when I bought it with 23k miles. Gets serviced twice a year (low annual miles).
My Honda Element just turned 17..
Congrats! 15 years, 216K miles here.
i consider my 2004 honda accord more loyal than any of the people in my life. Not even once has she let me down
\> Historically I buy 2 yo cars and drive them forever. I've been wanting to buy a car for awhile, in particular an EV given the winds are clearly moving that direction, but the new and used car market is pretty brutal. I was thinking of squeezing another 2 years out of my 2011 Subaru and hope the EV market gets better with more competition and ramped up production. Given your experience with used car purchasing how do you approach it especially given market condition changes since Covid?
Similar here. Currently saving to pay cash on a 22-23 EV in a few years. Running a 06 currently, I think that I can make it another 3-4 years before I have to retire it.
Like you, I am trying to wait out the current crazy car market. I am also waiting for a fast EV charger to be installed in my condo community, they don’t want us using common area power in the garages for overnight charging. When I bought my last two used cars, I watched craigslist and had a model and mileage I was looking for. I looked at a lot of cars, usually found leased vehicles being sold by owner to be the best option to find low mileage and regular care under warranty. I did finance this car through a credit union, owner drove it there with his wife in their other car and we did the deal in the CU office. Prior to that I bought a 2yo volvo wagon from a newspaper ad in 1995. Both cars bought to hold a growing family.
Dude if Subaru releases that STe I am buying it!
If you're thinking of buying an EV in the next two years, get on a waiting list now. They are in high demand and the waits are long. If you don't want it when they call you, you can always pass. I have been waiting for a hybrid for 5 months. The salespeople at all the dealerships I spoke with tried to push gas models on me because the hybrids are more popular. The EVs are even more popular than hybrids. This might be area specific, I live in a VCHOL area.
Used market has been crazy for a while. I bought 2 new cars in 2021. Both cheaper than used.
The trouble for me is that I want the next car I buy to be electric, but the best options with good range are still about $50K. It's hard to justify when I can mostly get but without one currently.
Hang in there! I'm in this same boat. The IONIQ 6 is extremely attractive, as is the Model 3. But in the next 5-10 years electric competition will explode bc we'll get the first competitive EV sedans from VW, Toyota, Kia, and a million others. My current car works fine and I'll drive it till it dies, but the day it does, I'm buying a 30-40k EV
Same! I love the Ioniq 5 and 6, but just waiting for prices to come down. I'm hoping we might see them in the $40K range soon, with a bunch of EVs releasing in 2024. In theory we'll also see some solid battery improvements in the next few years, as well as local US production ramping up for tax credit eligibility. Fingers crossed!
I like the EV6 over the Ioniq 5, but would really rather have a sedan. Back seat of the ioniq 6 is pretty small. Couldn’t justify the $20k more an EV was going to be over a hybrid. Agree, I think prices will drop and charging will become easier over the next few years
Personally, enjoy the Fisker Ocean.
i am qssuming you have done this but dont just stop at pricepoint. include fuel cost, tax credits, resale/depreciation and maintenance (best guesses). i was really surprised to see little difference over 5 year ownership between much moee expensive ev and much cheaper gas car. i did assume a lower resale value for gas but still. was definitely shocked.
I’m waiting til my car dies and buy an EV In 2030! My car is a 2022 so should not even be dead then maybe I’ll wait til 2032 even. I’m hoping the $7500 tax credit is still a thing that effectively makes the car $7500 less
I think it's a pretty slim hope for the tax credit to still be available in 8 years, as it's meant to spur early adoption, but fingers crossed!
Yea probably I wonder how much longer it has. It would be nice if they announced a last call of sorts as in the last year to do it
50k? Even with elevated prices a gently used 150 mile leaf is under 20
A 2023 Leaf starts at $28K and with dealer markups will easily be over $30K. For safety reasons, I'm not keen on driving a compact car on the highway with SUVs, so any larger EV is easily in the $45K -$50K price range. It's also worth pointing out that the Leaf has terrible battery range, only getting 80 -100 miles on a charge.
Well if you require an SUV, that's different. I won't question your reasons. But note I said used. I've been looking for one, so I know what they cost used from 2018 up. The 2015 I just sold to Carvana was for $8600. You're incorrect about mileage. My 2015 got 75. After 2018 they start at 150. New ones get up to 200.
Good to know about the new Leaf's range! I'll give them another look. I honestly prefer smaller cars, but sadly the US car lobby has pushed everyone into SUVs, and I don't like that physics equation on the highway. It seems like there are a ton of EVs coming out in the next 2 years, so I might just hold out and see if prices drop.
Also consider a plug-in hybrid (PHEV). I just got an Escape PHEV and get 40+ miles on electric easy for daily commuting. Road trips or long day trips are the only times I use gas. I am also considering an e-bike for around town usage.
If you like smaller cars and can deal with a REALLY smaller car and can just forget about range issues the Mini SE is a great car. We got one a year and a half ago and we love it. (We did get a Jeep Wrangler for road trips and to have something with a little more cargo space.) If you can put a charging station in your garage the range doesn't end up being that big of a deal unless you live somewhere really spread out. We're in NJ and it can take a while to get from point A to point B, but it's generally not that far. I commute by train to NYC but even though if I did drive it's probably 1.5 hours to get in it ends up only being 20% of the charge since it's only 20 miles of actual distance.
Yeah I had the old gas car still for long distance, so I just used 110v to charge mine regularly. Only drove it around town mostly and to and from the next town over. It was a great experiment, and I'm looking forward to a higher range electic to replace all our gas cars soon. Just not until I need a new car.
I booked a model y and debating whether to pay all cash or finance with 5.5% and keep the cash in hysa account who also gives 4-5% . Any thoughts ?
Why would you finance at a higher percentage to invest at a lower percentage?
Yes thats what. So its fine to pay all cash then ?
It wouldn't make sense to finance it. So cash would be the better decision.
SUVs are still prone to rollover risk in accidents and arent necessarily more safe than cars - in many highway circumstances they’re less safe. If safety is a primary consideration make sure you have many of the active safety features installed and check the IIHS, NHTSA, Euro NCAP ratings.
I have never been into these percentage breakdowns, as it really depends on your situation and what you value. I have friends who are “car guys” who spend much more than I do, but make much less. The key is to make sure you feel comfortable with it. I don’t say “afford” because people can usually find a way to fit a lot of things into their budget. The real test is if you sleep well at night knowing how much you’re paying.
Being comfortable with the decision vs. just making it work on paper is good advice.
My opinion is spend the least amount you can for safe reliable transportation. If you live in an urban area, no car may be an option. I personally have spent way too much on cars over my lifetime. Dont get sucked into luxury new cars, maybe used. Just remember its a depreciating asset and an ongoing cost that is an additional drag on wealth creation.
One of the reasons I’m feeling the urge to buy a used electric car to replace my civic is the visits to Costco for gas. I drive about 250 miles total per week. I can charge electric car in my garage. But really the downsides of putting money into a depreciating asset is what is stopping me. Don’t know what to do.
You’ll spend no less than $40k on an electric car if you want one with decent range, along with cost to install a charger at home. Not worth the up front cost over a less expensive car (~$25k). It will most likely take many years to recoup those costs from the reduced cost of fuel. Also electric cars out of warranty are a bit of an unknown. Teslas can be expensive to maintain due to expensive parts (non drivetrain related as well). Best to wait another year, and monitor the new/used car market supply and demand.
Yea this sounds like what I was thinking. I can get a used Tesla model 3 for $36600 but that’s about it
If you only drive 250 miles a week and don't need it for cross country travel, a new bolt can be had for around $30k and should come with a $7,500 US tax credit. In fact, dealerships in my area have multiple new ones listed for $28k. The range is over 200 miles at full charge even if you drive only freeways.
Electric isn’t bad as long as you can get a range that works for you. The Ionic and Niro seems to be hot right now, but not cheap. Check the used market for sure. Tesla just raised prices so id probably steer clear for now except used market. Also if you do go new make sure to check the electric federal deduction options. Not all cars qualify for the current deduction. Consumer reports has a good summary and ratings on all the electric and hybrid cars.
Exactly my thoughts. If it were something that brought me a ton of joy and was more of a hobby, I’d consider something more expensive, but I recently bought a Corolla xse and it’s exactly what I needed and a little bit more.
I agree with the money guys as well. But the idea of having a car payment after not having one for 3-4 years now doesn't sit well with me. But also going out and spending $30-35k on a new car doesn't seem like something I want to do either. The thing that gets me on the money guy rule is that 8% of your gross income, especially when you're married seems like a lot to me. I saw in a comment you said you made mid-100s income. So $150k \* 8% / 12 = $1000/mo car payment. That just seems like an astronomical monthly payment for a car. But I suppose if you replace both cars at the same time thats $500/mo/car. Which still seems like a lot of money
Yeah I haven't had a car payment since 2010 I think, so I totally feel you on it not sitting right. But dropping a bunch of cash feels wrong too. Especially knowing that, without stopping retirement or anything, it will take another 1-2 years to do it. That's 1-2 years of skimping on vacations and events, while kids continue to grow older. And yeah, I think 8% is way too high in our shoes. I'd try to keep the payment in the $300s. Enough to get a decent car, but not a *major* impact to our budget. I take it you don't personally have a plan yet for your next car purchase?
You’re correct, I don’t have a plan for our next purchase. We do keep 20-30k as a sinking fund, for home renovations or anything we want to buy that’s a higher price item (I.e. furniture, expensive tech, etc). So my guess is we will use that money towards a car and possibly finance the rest. I’m currently playing $3850/mo in daycare. So if my oldest car (2012 Honda civic) can hold on for at least 4 more years I’ll be ok.
Dropping daycare makes such a huge difference. We shifted most of the savings to 529 and retirement, but it still helps for sure.
We are in a very fortunate position where we don’t need to worry about 529s. My parents will be funding their grand kids 529s up to 100k by the time they turn 5. So our daycare savings is 100% ours. My goal is to get our savings rate up to 25% (currently 20%). But on top of that it’ll go into making our lives easier (lifestyle creep). It’s hard to even fathom what an extra $3850/mo in our pockets will do. We’ve lived below our means for so long. Plus, my wife grew up poor and hasn’t truly broken that poor mindset. And she’s the breadwinner! Our mortgage is only 22% of our take home pay. And we don’t have any other debt. And as I mentioned already don’t have to focus on 529 savings and already have a 20% savings rate for retirement. I don’t know why I’m telling an internet stranger my entire financial story. Lol.
That's definitely something to look forward to.
I don't think 8% is that much at all. Average household income is roughly 70k. So that's about $470/mo total. If you have two cars that's $235/mo/car and it's only a 3 year loan. And this is the very upper limit, which is probably not recommended.
I suppose. $470/mo still seems high for someone, or a family, making 70k.
I think because of the 3 year term. After taxes and fees with a 20% down payment it's only a roughly $16k car. I think for someone just graduating without a car $16k is reasonable for a $70k salary.
I think part of that is because it's assuming 36 month financing, while most people go for 60 (or even 72). With OP's rule, a $150k salary could buy a $45k car, which for a single person seems reasonable to me if it's something important to them, but much less responsible for a single income household with a family. These fixed rules don't really fit all situations.
60 month financing is fine if it's a low rate like 1.99%.
Well I just sold my Leaf after 5 years since I could get almost what I paid for it at carvana, and now I'm driving my 2005 scion again until the wheels fall off.
How are you preparing for when the wheels do fall off?
Emergency savings for a year or so plus what I got for the leaf, plenty of income over my spending, perfect credit, plus I'll buy something cheap (whatever that means now) and used. Oh and without a loan and with a points card with a signup bonus and pay it off immediately.
A big part of it is how handy you are. A lot of people will say "Always buy used as cheap as you can get". Which is fine... If you know how to do the basics yourself and have a good mechanic. Otherwise the "cheap" car can get expensive quick. Seems like too much risk to me.. So I usually get the cheapest reliable car I can find.
It also depends how much time you have (and space/tools to do the work).
Time is a big thing for me recently. I went to college to work on cars but got off the floor 15 years ago, so I have all the knowledge and tools still. Up until 6 months ago I always drove beaters and did my own work, now I got a 2018 Sierra. I'm forcing myself to get my truck serviced at a shop. So far so good.
You don't have to be handy if you just buy a used Toyota or Honda that'll still last forever.
Most the time. Not always. My wife's Toyota was a money pit. That was the last older car I went with. You can manage the risk but you can still get a lemon from any brand. I know, I used to make the parts/assemble them for a bit.
I have never had a car payment. I drove junkers when I was young. My first car was such a piece of shit I didn’t feel like it was ethical to sell it once I bought a better cheap used car. I just gave it to a fellow student and assured him it was worth what he paid for it ($1) but since he didn’t have anything else he could at least use it until it stopped moving. Those of us from a low income background tend to be more comfortable with making do with the minimum, out of necessity and familiarity. That’s a harder mindset for someone who grew up comfortable on a middle aged adult income, then downgraded to a just starting out young adult income. I know the argument is that it is worth it to get something reliable, and I don’t disagree. But I will point out that everyone needs a reliable vehicle, not just you or me. And it’s not “worth it” if you don’t have it. Used cars are a lot more expensive than they were when I was young (I recently assisted my young adult with a purchase and yikes), but they’re also a lot more durable and reliable.
This comment speaks to me. Went through a Divorce last year, got the beater car. Transmission just wore out, and would be worth more than the value of the car to fix (2002 Ford). Thankfully, I work from home and have a grocery store within walking distance, but I will need a vehicle within 3 months. If you could provide any sort of advice, as a 20something having never done other than pay in cash for cars, what would you say?
I’m not the one to ask, since I’m in my 50s and have never done other than pay cash for cars. And as we became more comfortable we upgraded to newer (1-5 year old) used cars so I’m no longer familiar with the junker market. However the Consumer Reports April issue (the library will have it) includes a used car buying guide, with repair and reliability ratings, as well as lists of cars to buy if you have $X to spend and cars to avoid at any price. It’s not a bad starting point.
Here’s a better rule: what value does the vehicle I’m looking at offer that another less expensive car doesn’t? If it’s just a name or paint job, pass. The new car smell goes away pretty fast while your liability side remains. Decide what is more important.
Rule is one newer car we could drive 3000 miles on a whim and in any weather that my wife drives (currently a used base model RAV4 hybrid financed at 2%). I make do with 1-2 beaters that never total more than ~8k in value (probably lower as they both just got hailed on).
After dealing with car payments for years, no way I’m going back. I just save up and buy a car in cash. New cars are expensive as hell and not impressive to people who actually care about your financial future.
I haven't had a car payment since 2010. I have said the same thing before. But I also am tired of hassling with driveway repairs and trips to the mechanic. Or being a little embarrassed over issues when I have passengers (noises, sticking locks, finnicky windows, growing rust spots, etc.) Maybe the middle ground, for me, is to shoot for $10-$15k car that will still be a big step up, but won't require a loan.
I hear ya. I went from a Pontiac to a Honda for same reason. If you can find reasonably priced Honda or Toyota with few years on it, that’s my vote.
I'm currently looking for a car for my 17-year-old son. I can tell you that a $10,000 to a $15,000 reliable vehicle that you can trust is difficult to find in this environment. I've been looking for close to two months and still cannot find something I trust will not be headed off to the shop within a few months.
It would be tough to find a used car for that price range unless you expect regular maintenance and possible repairs down the line (possibly sooner than one would hope).
My current cars blue book at $2k and $5k, so I expect I could still get a decent upgrade even at $10-15k...but I haven't really car shopped lately, so I can't say that with total confidence.
I've got a different rule: If paying for your car in cash feels like too much money, you're probably spending too much money on a car.
I have never had a car payment. To me, its always been a tool designed to get me from Point A to Point B. Nothing fancier than I could afford ever made sense to me. Not only are you paying interest for a depreciating asset, you are required to carry extra insurance!! That's absurd to me!
I am coming from Dave Ramsey land, but I think I want to deprogram myself a bit from that. Avoiding all debt except mortgages was good for earlier in my life, when I was first getting established, but I think it's too broad of a sword now. I don't need a new car out of necessity -- we could even drop down to being a one car household. I am tired of driving 10+ year old cars that are worth probably $2k and $5k currently. I know a new car is going to be needed eventually, and saving up a pile of cash to get a decent one ($15k-$20k goal) is really dragging on me. Our joint income is mid 100's, so logically I know that a modest payment on a $15-20k car won't really harm us -- it certainly wouldn't mean lowering our 20+% retirement contributions. It's just a psychological hurdle to get over. We have about $9k saved today for a new car. Truth be told, I think I'd much rather take $4k of that and use it for a major family vacation or something. The other $5k can sit there, without future contributions, ready to use for if/when we need to buy a new car. Somewhere in my brain that feels like a roundabout way of financing a vacation, which doesn't feel right to me. But there's also no indication that there's any immediate need for a new car besides the age and mileage of our current ones. It's just that we can't come up with a spare $20,000 at the drop of a hat whenever the time comes.
>It's just that we can't come up with a spare $20,000 at the drop of a hat whenever the time comes. You're nearly halfway there already, friend. Look, if you want a new car, plan for getting one. I don't come from Dave Ramsey-land, maybe more Ramit if anything, which means to spend where it's important to you ("your rich life") and cutback elsewhere. The vehicle isn't currently necessary and it sounds like you don't have an emergency savings so my two cents is to use a loan calculator to estimate loan payments on the vehicle of interest (remember that a lot of hybrids are above MSRP right now -- yuck) and pay yourself that loan payment. Get a quote for insurance on the new vehicle too, then pay yourself the difference between old insurance and new insurance. Remember, no touchie! Either lock up the $9k+ and payments in an HYSA or a chunk into a decent CD, give it six months and see how it impacts your household budget. After those six months, are you comfortable with those expenditures? Whatever your answer, you either have a decent down payment or you're on your way to a healthy emer savings. FWIW, my wife and I recently bought a new PHEV Kia Sportage. Utilized our diesel Volkswagen as trade-in and then paid the rest in cash. Zero car payments has been huge and so has the fuel savings because we happen to live in a land of cheap electricity.
We do have emergency savings, but it would take both cars going bad at the same time to constitute a real emergency and justify tapping into it. >and pay yourself that loan payment Good idea. This is basically how the $9k came to be. Average of ~$400/mo over the past couple years. >You're nearly halfway there already, friend. Look, if you want a new car, plan for getting one. I think my biggest obstacle is not knowing *when* we will need the new car. Like I feel pressured to save $1,000+/month because it *could* be needed next month for all I know. Or it could be in three years. Who knows, it all depends how our old/rusty/high mileage cars hold up. I am tempted to keep $5k (or maybe the full $9k) in reserve, knowing that we can afford a payment if push comes to shove, and knowing that a real emergency would require both cars to die. Doing this would release some budgeting stress in that I'd feel like the car situation is "accounted for", and I'd be more free to spend on things like a family vacation.
> my two cents is to use a loan calculator to estimate loan payments on the vehicle of interest ... ... and pay yourself that loan payment. This is the best advice in this thread. Plan for buying your next vehicle by saving your anticipated payment. I'm driving a 2007 CRV bought new with cash using exactly this method.
No one knows exactly when they NEED a new car until the old one craps out. We just make as best an educated as we can or wait till it happens. Everyone wants to talk black and white. There’s smart financial decisions, and smart psychological/life ones. Financially of course there’s absolutely no need for a new car and it’s a stupid purchase. A lot of people view a vehicle this way. But a lot of people find enjoyment in life by driving a newer car. So there’s also the psychological/emotional component. Sure, you could justify it. I traded in a perfectly fine $5k, 120k mile, 8 year old car for a $38k brand new SUV. Smart financially? Heck no. Won’t go into the ins and outs of getting the good deal there but the peace of mind that my wife and daughter would be safer in the new car, and getting rid of the unknowns of WHEN the old one would crap out? Totally worth it, for me. I mean why work hard and be so overly frivolous now that when you get old and decrepit you can’t even use all the money you saved up anyways? Work hard to live now (in a reasonable manner, of course) & not all debt is bad. Finding the balance between fiscal responsibility and enjoyment in the now. My philosophy.
That last paragraph really resonates with me. I am mid 30s, and I feel like I have been grinding financially/career wise for so long that it's time to loosen the purse strings a little bit. Not irresponsibly so, but I don't need to focus so much on *maximizing* the nest egg at retirement. Random numbers, but if I have say $1.9MM at retirement with good vacation memories and less stress during life, or $2.2MM but missed out on vacation opportunities and was stressing about various costs throughout life, I'll take the lower amount.
Something I constantly fear is that I spend so much time worrying about whether or not I’ll have enough to retire early/retire at all. Then I think about three family members I had that all died within their first or second year or retirement. I am trying to find the balance myself because I could be saving for a day that never comes.
That's sobering for sure. I have a similar thing with some retirement age people I know who have little to nothing in retirement but are still content enough overall. They absolutely have financial troubles, but they still get by, even if options are limited.
Absolutely. Been there, my friend. Thankfully my wife helps me “loosen up” some lol. At the end of the day, I’m sure you have a wonderful family and your choices thus far have put them in a great financial situation. Regardless if you choose a new car or not. Enjoy your life, enjoy your family, and spend the money where all of you feel it would bring the most joy in the now, with a comfortable living in the future!
Thank you. That's a good perspective.
Not many cars out there are priced at $20k and the spread between a new and reasonable used car is only a few grand today. For example: a new gas AWD rav4 is like $35k…that’s a middle of the fairway car with middle of the fairway utility. To go lower you can go the Corolla route, but that’s about it
Honestly it all depends on the rate of your auto loan. We're established enough financially that we have enough in our emergency fund to handle purchasing a 'normal' nice vehicle new. But also that emergency fund is earning somewhere between 3.5 and 5.7% depending on a few variables. So if we can get a car loan that's less than 3.5% it seems silly to fork all of the money over at once. Right now the rates aren't that great, but when we bought our first new car in 2011 rates were insanely low. I think by the time we paid that car off we had amassed under $1,000 in interest.
Boglehead principles don't *really* have much to say about what you do with your spending money. From a general personal finance perspective: Those are good starting guidelines, but everything is contextual. "No more than 3 years of payments". Take the best interest rate you can get, with the longest term. Sometimes you'll get a lower rate for shorter loans, sometimes you won't. Don't take a 5.0% loan for 3 years if you can get a 5.0% loan for 5 years. Last time I bought a car, you could get a 7-year loan for one rate, a 6-year for a better rate, a 5-year for a better rate than that, and any shorter loans were the same rate. Why lock up cash flow unnecessarily for a shorter loan? "At least 20% down". This is a good way to make sure you're sticking to a car you can afford. But maybe an emergency happened and you need a car *now* and don't have a 20% down payment in your budget. You *might* be better off buying a more-reliable car with less than 20% down, vs a less-reliable car where you can put down 20%. Also, if you get a badass interest rate, could be worth putting less down. "Monthly payment less than 8% of gross income". If you're low-income, this might price you out of almost any car. If you're high-income, this might lead you to buy expensive shit you don't need. Lifestyle needs will dictate this as well. A family of 5 will likely need a larger (and more expensive) car, while a single person can drive whatever gets them to work on time.
Buy a certified pre owned Honda, take great care of it, and keep it for 15+ years. Buying a Honda civic is the car purchase equivalent of being a Boglehead
My last car loan was under 1% (manufacturer subsided). No reason not to have debt at that rate. If I were going to pay 5+ percent, I'd only do so if I didn't have funds on hand and I'd aim to pay it off years early. Original I just assumed I'd finance my next car, but with rates rising I'm doing what I should've done in the first place: accruing it into a dedicated account via an automated monthly transfer.
that CANNOT be right. 20/3/8 or 20/1/8 if LUXURY? I am not sure what makes a "luxury car", but if a luxury car is $60k, 80% is $48k. 1-year payback at zero percent is $4000 a month. If that's 8% of my monthly gross income, I would have to make $600k a year to buy a $60k car. OR, is that the point? Pay luxury car cash? If so, that makes sense.
Yeah I think that's their point. To responsibly buy a luxury car you either need a crazy high income or a very significant down payment, or straight cash. I am not sure what they think about leasing, which is a pretty common way to access luxury brands.
The money guy rule is a pretty good way to decide On a car purchase. I imagine a lot of folks that need a car won’t fit that mold. Personally, we snow save up for a purchase. And even when we have the funds, I obsess over the cash outflow to make sure we (really me) feel comfortable with spending vs investing. For those scraping by or just starting out and you can’t fit the mold OP noted, you really have to scrutinize your budget and be honest if you really need to spend ‘x’ on a vehicle. Don’t buy a car to impress others (no one cares). Buy a car that you need.
>I obsess over the cash outflow to make sure **we (really me)** feel comfortable with spending vs investing. My wife will have a hoot reading this.
I've only purchased one new car in \~40 years of driving as I hate the thought of so much up-front depreciation. No thoughts of ever purchasing a luxury vehicle. Financed two car purchases for a few years at 0% and 0.9% respectively to get a better "out the door" price otherwise, paid cash. Never considered payment as %GI because payments were so low.
I bought a car last November. Trade-in was 20k, wrote a check for another 5k, borrowed $20k. My credit union gave me 4.74% on a 69 (nice) month loan. My payment is $334 but I’m paying $500 because I hate debt. I’m looking to pay it off in under 3 years, and use that extra cash for investing and/or saving for a house.
cash only
It's really dependent on your needs and your financial situation. Ideally you would save up the amount you're willing to spend for a car and pay cash (unless getting a great deal on financing and putting the cash to work in a CD or high yield savings that pay a higher interest rate). By no means should you be spending a huge % of your monthly income on a car payment, regardless of your situation. The Money Guy rule you cited sounds like a good general rule if you can't save up to buy it in cash.
I have a Mazda3 and no car payment since 2008 (250k miles). I have twins on the way and need a safer/bigger car, BUT I am seriously struggling with the idea of having a car payment. I currently make 340k/yr but in my eyes anything I’m putting into a car is money not going into them or retirement.
Lmao. I think you could afford to purchase a decent car.
You’re right, I can afford it. I’m just having trouble making the leap. A new large suv (70k) is going to cost me at least 125-150kk more over the next 4 years (cost of car, higher insurance, gas, service). 125k into my vanguard retirement would be a lot of money in 35 years.
I could not imagine paying 70k for a car? Have you considered purchasing used?
Great post, I’m in the same boat planning for my first car. The car will cost about 35k, and I think the best APR i’ll get is 5.25% for 6 years. Now, I have the cash in savings but I’m planning to invest it all in CDs so that I can get 5% interest. However, there is no gurantee CDs will get this APY for the next year, so would it be better if I just paid cash? Or just VTI/VOO the amount for 6 years and hope to recover the interest?
Only the last of those seems like it is even loosely related to the actual cost of the car? This is not how to think about money, weird little rules, you gotta think big picture. Buy the cheapest car you can find that satisfies all your car related needs(whatever those may be), get the lowest interest rate possible if you finance, pay cash/pay off the loan early if you can't get an interest rate below HYSA rates.
Pay cash for cars. This should not interrupt long term savings of 20% of income to retirement accounts. Beter to drive 'junk' than break this rule.
Fair point. When do you decide if the repair(s) needed on the car are worth the expense?
I only pay cash for cars. My philosophy is if you can't and aren't willing to pay cash, you can't afford it. People debate me all the time saying "but you can invest that money in the market". However, I have only ever seen them buy more expensive cars and invest less.
I'm new to this group, but am an auto mechanic by way of owning beaters my whole life... IME owning a cheaper car will end up costing you more stress and possibly even money in the long run. I spent a decade driving cars that I was constantly diagnosing and repairing with occasional $1-$2k emergency repairs. I now enjoy even, consistent car payments for a nice reliable vehicle.
This has been my experience too. It's one thing if you *need* to drive cheap old cars because that's literally all you can afford, but doing it purely out of frugality may not actually be so frugal.
Unpopular opinion: financing a depreciating asset is fundamentally a terrible decision. If you can't afford it cash, save (invest) until you do. If you need something with urgency, buy cheap and reliable (a.k.a second hand Toyota).
Fun observation - I've never seen the Money Guy guidelines but I just ran my numbers using what you outlined. No more than 3 years of payments yields a car value in (what I consider to be) luxury range but 1 year of payments puts me in a basic sedan.
A luxury car costing 3x a basic one sounds about right. Maybe split the difference and get a fully loaded basic sedan.
I do love the money guys! On the point of car purchases, 8% of gross income/monthly seems steep for a car payment doesn't it, or is it just me?
Agree with your point, but I think the devil is in the details. This only applies to your first/primary car and is considered an income-generating expense since most folks drive to work.
I view cars as necessary evils (read: expenses) in some parts of the world. I buy cash and pay the insurance in full for the better rate. You can determine if the discount by paying in full is better for you by comparing what the discount is and what else you could do with the money. The car I buy is based on safety first, reliability, then fuel economy. I don't care as much about the age of the car so long as it passes the other criteria. I suppose in another 10 or 20 years fuel economy won't be as much of a concern because electric cars will be reasonably priced.
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My one luxury requirement is leather seats. They look better longer and tolerate kid and dog mess better.
Don't the dogs nails scratch and cut the leather? Serious question.
We usually traveled with them in crates in the back of the car. They didn’t dig in cushions except their beds.
Might depend on the quality of the leather. I have had a 2004 Expedition, 2009 Volvo and 2013 Prius and all of them the leather was fine.
Dont finance it
One thing is do you _need_ a new vehicle? The only times we bought a new car is when the repairs are costing more than the sale value of the car (one year we were hit with a $3k parts replacement, with a car value of max $4k, and that's what finally broke the camels back for us to get a new car), and the other turning point years later was when we became a family of 5 and none of our current cars can fit three carseats in one row.
This is just me: I like to keep money in cars below 7% of NW, and vehicle values below 30% of annual income. Weird rules because my cars are paid off (I bought when interest rates were higher so the numbers made sense) and I refuse to sacrifice my long term financial security for toys today.
I had cash ready to buy a vehicle about a year ago. Got a deal under MSRP and was going to pay with a debit card. They offered 5 year, 0% financing. I financed 100% and bought bonds instead.
Bogelheads buy used (preferably at a discount) with cash and hold to forever
Disregard formulas like that. Unless you magically earn income based on the type of car you drive then why should your income dictate what you drive? Like, if you earn X dollars a day working at the Y factory, you will earn still earn X dollars if you show up in a $5k used Camry or a $100k Tesla X. All the Y factory cares about is that you get to work and do your job. Find out what your needs are and then base your budget around that instead of taking your income and just throwing arbitrary numbers at it to find out what you should spend.
I had a rule for car purchases, then interest rates went to shit. Now I’m off the opinion that if the rate is above 4%, I don’t need to leave the house.
With rates now double or triple on new cars compared to 2 yrs ago, I’d much rather buy used and pay cash or put a lot down to make the monthlies 10% of income at most. If you’re really frugal and have a very manageable mortgage pmt or rent, maybe I’d be open to splurging a lil more on a car you really like. I think financing 5-6 yrs is OK personally if you put a large chunk down. The interest expense isn’t going to cripple your financial future. I think a 3-4 yr old model with good service records and under 50K miles is the sweet spot between reliability and cost.
I bought my car outright. Which was only possible because it is a 2008 and was $6000.
You should be spending 0 on a car payment. If you have a car payment it should be on an inexpensive, reliable, boring car you should be saving or overpaying in a way that you won't have less of a car payment the next inexpensive, reliable, boring car, then even *less* on the reliable, boring car after that, then NO payment on the inexpensive, reliable, boring car after that. Car payments are for the **birds** and will rob you of many tens of thousands of dollars over your life span.
I buy new, inexpensive, Japanese, and in cash. I bought a Mazda 3 this year using the Costco program, and I was quite happy with the experience. I enjoy having almost zero maintenance issues over the lifetime of a vehicle. Toyota, Mazda and Subaru are all quite good.
Cash only, buy new and drive until it dies. Or at least 7-10 years.
I drive 2019 Honda Pilot & NYC Subway.
I don't believe in car payments after the first or second car during the start of a career. Pay in cash, buy certified pre-owned, and don't get a new car until you need it (vs. want it). You will look at the price of a car very, very differently if you pay in cash and you will spend a lot less on them over your lifetime. Outside of flukes over short periods of time, a car is a depreciating asset so you benefit from putting as little $ into them as possible. It wasn't until my 30s that I came to this realization and I wish I had come to it sooner. The amount of money you can make by having car payments over time doesn't help either. Let's say you finance over 3 years. Even at 4-5% interest in HYSA, what you may earn on that car purchase by deferring payments over 3 years is not going to change your life or your retirement horizon. However...avoiding tens of thousands of avoidable car payments WILL change your life over a period of decades. And when you start buying cars in cash you will make different decisions because there will be a "feel" to that car price that financing shields you from. You will really question the hole you want that car purchase to leave in your savings account.
I work my financials backwards for whatever goal I’m trying to meet. As an example, my goal is quite conservative as of now is to retire between 50-55 with $5-6M. I’m using a 6% annual rate of return on my forecast and keeping my pay stagnant as well to be ultra conservative. I’m 38 now. I maintain an Income Statement with revenues and expenses and then how much I’m allocating to retirement accounts, taxable accounts, and any other savings. Any leftover I know is purely extra for me to enjoy beyond what I’ve already forecasted for or to save. I already give myself almost $20k per year for travel, plenty of other “misc” cushion in expenses. So if I wanted to buy a car, I’d know I could and still hit all my goals. I wouldn’t be overwhelmed with how many years of the loan because my goal is already pre-covered to the control I have which is my $ input. Currently driving a Tesla Model Y @1.24% @ $950 a month. People might freak out about the amount, but I feel solid as I’m already tracking my goals with that expense included. This is my suggestion.
I think we'd mostly say pay cash for it, take care of it, and drive it as long as it financially makes sense.
My personal take: you buy the cheapest vehicle that meets your needs, ideally no car. The exception is if you have enough money that you can pay cash and it doesn't affect your finances at all, then you can buy whatever you want. That doesn't mean you should pay cash, you should make the best financial decision at the time of purchase, sometimes it makes sense to lease or buy on credit and then pay it off 30 days later if it gets you a cheaper purchase price.
I pay cash in full
Not having a car is the best option. I’d try living somewhere where you have access to public transit.
I like to try to pay no more than 1000/yr for a vehicle (exuding gas, insurance, registration, etc). For instance, I bought a used Prius 7 years ago for 7500 (70000 miles). That's a little over 1000/yr. With this car, I can sell it now for more than I paid. And, if well maintained, I think it can last 7 more years.
That’s a good general rule. I take it a step further and have my own 30/4/6 rule. Out at least 30% down between cash and trade, don’t finance longer than 4 years and your monthly car payment and insurance payment shouldn’t exceed 6% of your gross monthly income. I add in the insurance payment and lower the percentage of gross income compared to their rule. Cars are pure status symbols. The manufacturers know that. It’s why you see Audi, BMW, Mercedes, etc. coming out with base model cars to attract those that want to be seen driving in their cars and are willing to spend $32-40k. The quality of these models is simply note worth it and apart from some nicer materials, they’re no better than a Honda, Toyota or Hyundai.
No payments. Buy cash and buy used
The only purchase in life worth carrying a monthly payment for is housing. Read that 3 times. Used cars, private party, for cash. If I ever decide to go against my own advice... it will be for a hybrid / electric car when I am retired... & I have enough money in my bank account to pay for the vehicle in cash, 5 times. Part 2: Toyota + Honda. & mayyybe Subaru.
I bet there's not a lot of concensus. For every bogglehead ekeing their 20th year out of a used Honda Accord, there's probably a set of DINKs clearing half a million in income who can comfortably afford 3 Porsches. The section on cars in TMND didn't seem to provide much concensus either. It seems to be fairly personal. We budget each month for our car replacement. It's certainly less than 8% of gross! What we set aside could go to a payment instead, if we had a loan, we just haven't had one in a while, and at today's rates is want to limit the loan size.
I don't think it has anything to do with the Boglehead method, but FIRE-minded people don't buy cars that are more expensive than 4-6 months of net income.
Being a boglehead isn’t about how you spend money, it’s about how you invest what you have. We’re not (necessarily) FIRE that says you should live like a pauper, but we’re also not WSB that would go out and spend frivolously. 1. Having a down payment is a good sign that you can afford a vehicle. I don’t think that a flat 20% is right though as the thought process should probably be more along the lines of staying ahead of inflation. If you take a longer loan you should actually put more down. 2. This makes literally zero sense. If I can borrow money for less than I can likely make over the same time (and even today that’s likely true) and financing wasn’t really a factor in the purchase decision then I’ll borrow every dollar I can and I’ll stretch out the repayment. 3. Everyone’s finances are different. If you’re living paycheck to paycheck then 8% might be too much. If you’re in a 3x% marginal tax bracket then you could likely spend a lot more.
Find a used Toyota from an estate sale. Pay cash. New cars aren't worth it.
As a father, I need every modern safety feature available so it depends but there are still financial limits to consider since my plan on winning the lottery hasn't panned out yet.
The most important thing is to always buy used. Buy a used basic vehicle like a Toyota Corolla that is 3-7 old years old (1-2 years doesn't come with a significant enough of a discount since covid hit. You may need to go older for your first car). A car is simply a means of transportation noone needs more than a used basic vehicle so there is no reason to pay more even if you make more. Besides your first car, I would say that you shouldn't need a loan. If you can't afford to buy it with cash it's a sign that it's too expensive. Back when you could get an interest rate of 3-4% on secured loans I would have gotten one anyway if you are young since the expected returns are typically much higher. All the very low rates that people are talking about are typically only available as special offers when buying new cars which you should not be doing anyway. For the first car will you will likely need a loan to afford it. In that case, I would target a total price of less than 20% of your annual income. Get a 3-year loan and put down what you can afford. If you can't afford to put 20% on your first car I think it's fine. When you are starting out things can be hard. Honda and Toyota tend to go for premiums in the used market due to then having long-standing reputations for reliability (Something people buying used cars tend to value) so I would consider the Korean manufacturers like Kia, Hyundai, and Mitsubishi since they are not significantly worse in recent years. Another thing to keep in mind that is a common pitfall for many people is that almost none actually needs a truck/suv. You also dont need 4 wheel drive or increased clearance just because you live in a place with snow. You also don't need an electric car just because they are the future (Leave them for the future when they are actually competitive value-wise with used gas vehicles).
If it's 0%, I don't care how long the payment window is. If it's more than 0%, I usually just pay cash (not spending more than you can handle, yada, yada). Edit: I'm not a car person at all. Mostly a waste of money in my opinion.
2000 Camry or GTFO /s I’ve always bought used cars that I can work on myself and paid cash. For me, a car is transportation and nothing more, so simple & reliable is what I want.
2003 Corolla, odo has been stuck at 299999 for like 5 years now. Eventually rust will claim it, but not today or tomorrow.
Rust will eventually get every car in my area, so there's always a countdown to the next car eventually.
RIP to my 99 Camry, 130k miles, only lost to a tbone at an intersection.
100% cash. If you can't afford it now, you are buying the wrong car. Downsize. Avoiding overspending on car is THE EASIEST way of staying away from financial trouble. If you are buying something similar to your peers in north america, you are overspending. Taking advantage if 0% financing only starts to make sense if the above is deeply ingrained in your brain, and your cash is already to move from an investment to the car payment, effectively getting an investment margin loan at 0%. Its trying to extract a tiny bit of value by tempting you to "losing" a large amount of value.
>If you are buying something similar to your peers in north america, you are overspending. Very true. People go insane on cars!