Money tip: How to drive down car-debt commitment
Vehicle purchases are vitally important money decisions. Not only can autos be expensive, the buying decision could hamstring your cash flow for years.
As the weather heats up, so does action on car-dealer lots and showroom floors.
Many consumers will be trying to reconcile their bank-account balances with that delightful new-car smell, asking, “How much car can I afford?”
Vehicle purchases are vitally important money decisions. Not only can autos be expensive — the average price of new cars is more than $31,000, according to Kelley Blue Book — the buying decision could hamstring your cash flow for years.
What can you do? Here are a few rules of thumb.
Borrow for four years or less: As vehicles become more expensive, loan terms have lengthened. Loans can go to six or even eight years — that’s 96 months.
Money guru Clark Howard, who doles out advice on radio and television, has long advocated not taking out a loan longer than 42 months, or 3.5 years. “If your payment is too much at 42 months, that means you’re buying too much car,” he has said.
So, instead of financing for a longer period to reduce monthly payments, get a smaller payment by purchasing a less-expensive car.
Keep payments to 20 percent of take-home pay: The National Foundation for Credit Counseling advice is even more strict — suggesting that no more than 20 percent of take-home pay should go to all non-housing debt, including credit-card debt.
Don’t buy a new car: Depreciation is the issue here. A new car can depreciate 30 percent in the first year. That’s losing $9,000 in value on a $30,000 car during the first year. Is $9,000 a big deal in your life?
If you instead buy a vehicle a year or two old, you let somebody else “pay” that depreciation.
If you’re uncomfortable buying used, perhaps it would ease your mind to buy a used vehicle that is certified by the manufacturer.
Don’t lease: If you leased a car because you couldn’t afford payments, your automotive tastes might be outpacing your wallet.
Generally, financial experts frown on serial leasing for most people because they are continually paying for only the most expensive part of a car’s life, the first few years.
Drive until the wheels fall off: Not to be taken literally, this hints at the wisdom of keeping a vehicle a long time, say, more than 10 years.
Indeed, even the depreciation hit you absorb in buying a new car softens if you keep a vehicle a long time. The average age of a car on the road today is 11 years.
Remember that car repairs are typically cheaper than car payments.