Older people will probably react to this question with far more “hell no” replies than younger ones. If you’re young, buying a car — especially one you’ve fallen in love with — seems like a merit badge for adulthood, even if you can’t really afford it. The issue is: How can you tell what’s affordable or not?
There are several rules of thumb for how much you should spend on a vehicle. The most well-known, as espoused by interest is the 20/4/10 rule: Make a downpayment of 20 percent, finance for no more than four years, and don’t let the total cost of ownership — including insurance — exceed 10 percent of your gross monthly income.
So let’s run the numbers here, assuming that the buyer will need to borrow money to get the keys and has a decent credit rating. To follow the 20/4/10 rule in this case, you’d need $5,000 down. Total monthly costs shouldn’t run more than $266. Even if you’re getting the zero-percent loan for a brand-new model, the monthly payment alone is still $416.68; and because of that loan, you’ll need full insurance coverage as well, likely a minimum of $1,200 a year, and potentially far more. You could easily pay 20 percent of your monthly gross income for your car, and that’s a best-case scenario, leaving little room for living expenses and unexpected costs.
Rules like this get ignored with abandon; as Interest.com notes, the average price of a new car — now $32,000 — outpaces the median income for many Americans. Low interest rates and tech innovations like license-plate trackers mean subprime lenders have more money to give than ever, and more ways to get the cars back if people don’t pay. Dealerships train employees on how to get folks out of their comfort zones and into new cars on a daily basis.
How bad can it get? Take the newest trend of extremely long car loans; if this same deal above were stretched out to eight years at 6 percent interest, the monthly payment drops to $262. Close enough, right? Sign on the dotted line, buy some ramen and enjoy your new car.
Well…see, under that new deal, the bank will collect $5,200 in interest over the life of the loan; at your current income, that’s like giving the bank a week of your labor every year for eight years. Chances are that fairly soon into the loan, the car itself will be worth less than what you still owe; should your needs change or you have to get a different vehicle for work, you’ll have to pay up to escape. And you’ll have that $262 monthly payment for two presidential terms; if you lose your job six years from now, the car would still get repossessed.
There could be some special considerations that make a deal like this more reasonable; if this vehicle had a specific business purpose, there could be tax breaks that would offset some of the cost. But just because it can be done doesn’t mean it should be. If you’re earning $32,000 a year and really need a car — and be as smart about making the deal as the people on the other side of the desk. Wisdom isn’t age-dependent.
