This post contains affiliate links.
When it comes to the biggest purchases you’ll ever make, your vehicle is high on the list. In fact, the only more substantial things you’ll probably ever pay for will be your home and possibly your education.
But there’s a big difference between buying a car and shelling out for a house or education; a car, after all, is a depreciating asset.
Now I know buying a home and making money on it isn’t a sure thing. But by and large, if you’re willing to stay in your house long-term, you’ll be able to sell it for more than you paid (it doesn’t necessarily mean it’s a good investment, but you probably won’t lose money).
Paying for an education is a bit murkier.
Some degrees just make NO financial sense to get. Forking over massive dollars for a private school, out of state degree in underwater interpretive dance will only leave you soaking wet and in debt.
And both of those suck.
Other degrees, when chosen wisely and the return on investment carefully calculated, can have HUGE financial benefits that can set you up to CRUSH your finances.
Car Payments Suck
But a car? They suck.
Money that is. From their owners.
With the average car payment over $500 in the U.S. (and over $600 in Canada), they are quite literally killing your future, strangling any hope you have for financial freedom one massive monthly payment at a time. And what’s even worse is that the average new car loan length is 68 months.
68 months people!!?? Come on!!!
Having a car payment is a financial anchor. Forget frugal living standbys like giving up your lattes or buying second-hand underwear. Those are small savings compared to the financial mileage you could get without a car payment.
No, a car payment is the equivalent of having credit card debt of $13,000 and only paying the minimum. No person in their right mind would say that’s a good idea. And yet, many people continue to buy more car than they can afford and take on the payments that come with such foolishness.
If you’re thinking of buying a new car and are wondering how much car you can afford (or can’t afford), check out this handy calculator to run your own numbers. (Just be sure to fill in values for each field!)
Common Car Payment Justifications
The people who take on new car payments have all sorts of justifications for doing so. And I’ve heard every seemingly logical reason for taking on a car payment, as I’m sure you have too.
But I have to say, I’m not buying them.
Any of them.
And I’m going to help you bust these 5 common justifications for taking on a car payment.
1. It’s 0% financing!!
Yes, 0% financing does mean that you’re getting to borrow the money for free. But just because it’s “free” money, doesn’t mean it’s not costing you anything.
Don’t kid yourself. The car companies are making money hand over fist.
Cars lose anywhere from 10-50% of their value in the first year, depending on the make and model. After that, they lose anywhere from 15-25% annually.
What’s that mean for you?
If you pay $30,000 for a new car and finance is over 5 years at 0% (a short financing term since it’s now common to stretch it to 7 years or beyond). By the end of your 5 years, you will have paid $30,000 for a car that is now worth between $5000 and $14,000 (based on the spread of possible depreciation).
So to recap, you paid $30,000 for something that’s now worth maybe $10,000. You lost $20,000.
Where I come from, that ain’t free.
Now buying a car is never a winning financial proposition (unless you get a smoking deal at the Barrett Jackson auction. You’re almost always going to lose money. They key is to minimize your losses.
Which is why buying a used car that’s 2-4 years old makes the most sense because the bulk of the depreciation has already occurred.
2. I can afford the monthly payment!
One question that people often ask is how much car can they afford.
But when people ask the question, “how much car can I afford” what they really want to know is how much car payment is too much. Once they’ve crunched the numbers (or the dealer financing the new car has), often the car payment monthly average looks reasonable. In fact, a common refrain echoed from the glass-encased cubicles of car dealerships the world over is, “I can afford the monthly payment!!”
So your $30,000 car, financed at 0% over 5 years will give you a car payment monthly average of $500. That, on the face of it, may not seem too bad for many people. They look at their rough budget (if they have a budget), and calculate how this car payment plan will fit in. Or, in a more likely scenario, they look at their monthly take-home pay, see that it’s more than the car payment, and decide that they can afford the new car.
But really, can they???
I have no doubt that they can probably cover the monthly payment, although many people struggle with this (you’d be surprised at how many people google “how many car payments before repo”).
The question of affordability isn’t so much a cash flow question. That’s a short-term concern. Rather, people need to look further than the end of their noses and into the distant future.
Let’s say instead of taking on the $500 car payment, you used the $500/month to slowly upgrade your ride at a fraction of the total cost.
Eventually, you’ll get to the point where you’ll have a sweet ride that’s PAID FOR, and the $500 a month will be freed up.
What could you use that $500 a month for?
a) Invest it
$500/month invested in a low-cost index fund returning 7% a year would grow to over $250,000 in 20 years. (NOTE: The total time you could invest would be a lot longer than 20 years, but you’d need to redirect the $500/month at some point to save for a replacement vehicle).
b) Blow it on fun
What fun stuff could you do with $500/month that would bring you and your family joy? Oh, I dunno, maybe…take killer vacations, give your kids the types of travel experiences that are life-changing, work less so you can spend more time together, go out for dinner more often, go away on mom and dad only trips, get season’s tickets to the theatre or local sports team, etc. There are literally THOUSANDS of ways you could do use it to bring joy to those you care for!
c) A combination of A and B
Life is meant to be lived. It doesn’t make any sense to stockpile all that money and never use it for anything fun. At the same time, a balance needs to be struck between fun now and future planning. And that will look different for everyone. Just be sure that you’re putting enough away to let your future self have LOTS of fun too!!
When you look at it from this perspective, whether or not a person can afford the monthly car payment becomes kind of irrelevant.
The bigger question is can you afford to miss out on all of the wonderful opportunities and experiences that $500 car payment is robbing you of? This is where the TRUE FOMO should grip you like a vise and keep your hard earned money from going towards a new car payment.
3. I need something “reliable” for the commute
In addition to being the lamest excuse in the bunch, this is the one that also drives me absolutely bananas!!
The reason? It assumes that the only cars that are “reliable” are new ones.
And that’s just garbage.
According to AAA, the average maintenance cost on a new car is $99. So to own a “reliable” car costs $99/month (in addition to the insane monthly car payment).
We, on the other hand, own a 2011 Kia Sorento. When we bought it in 2014 we paid $19,000 for it and it included winter tires on rims.
So how does it stack up to a new, reliable car (you can’t hear it, but when I said reliable car it was dripping with sarcasm) as far as maintenance costs?
Since I’m a personal finance geek, I actually keep all of our car repair receipts. Going through those receipts over the 4 years we’ve owned it, we’ve spent about $5900 on our Kia in maintenance, including oil changes. That works out to $120/month that it’s cost us in repairs and general maintenance. That’s only $20 more than the maintenance for a new car.
In short, our used car (which we got at a fraction of the cost of a new one because it was 3 years old when we bought it) costs us $240 a year more in maintenance than a new one would’ve. So over the 4 years we’ve owned it, that’s $960.
When I think about this “lack of reliability”, we’ve MORE than made up for it in the fact that we saved close to 40% on the purchase price, or in the neighborhood of $15,000.
And we didn’t have a crappy monthly car payment!!
Not only that, but our car has been SUPER reliable.
We take it everywhere. I live in the West so we are constantly driving long distances, often in the middle of nowhere. I have no qualms about taking my family anywhere in the vehicle. In fact, next summer we’re driving it all the way to Toronto for a family vacation.
In short, we have a car that’s every bit as reliable as one that’s new. And, we don’t have the $500 monthly car payment.
People who use the old “reliability” excuse are simply willing to shell out thousands of dollars over the life of their car payment plan for the illusion of reliability. Because in reality, that argument is tired and getting old.
4. I want the peace of mind of a warranty and I don’t want to have to “pay” for repairs
Uh, newsflash. This just in. Breaking news.
You’re paying for the repairs.
How? I don’t have to pay for any repairs on my new car! It’s all covered under warranty!! (smugly said the person with the $500 monthly car payment)
Let me ask you a question. How do you think the car company can afford to cover repairs under warranty? They surely aren’t losing money when you buy a new car with warranty. No, instead they factor warranty costs and any potential repairs into the price of their new vehicles and then you end up paying for that warranty with your monthly car payment.
There are people whose whole job it is to determine the likelihood of a new vehicle needing a certain type of repair at a certain time after the car was purchased. They’ve done the math. And they’re really smart.
You’re not going to game the system and come out ahead.
And here’s the worst part. Most of the time what’s covered by the almighty warranty are things that have a low probability of needing to be repaired during the term of the warranty anyway.
Again, it would be stupid of the car companies to warranty something that had a high chance of needing to be repaired.
So instead of shelling out $500/month on a car payment and getting “free repairs”, try this.
Take $200 a month (or whatever you think you’ll need for repairs on a used car), and sock it away every month in a car repair fund. After a year you’ll have $2400 that you can use to cover any repairs or maintenance.
But wait, Matt!! $2400 a year is a TON to pay for car repairs!!
Yes, it is. But remember, on a car that’s 2-3 years old, you’re most likely not going to have MAJOR repairs. If you do, you’ll have $2400 stashed away. And if there are repairs that go beyond that…well, I recommend having an emergency fund in addition to your car repair fund.
And if you find that $200 is too much to put away each month, make tweaks in your budget to put away a more reasonable amount.
With this method, not only will you not have a monthly car payment, you’ll now have $300 leftover, which is a great problem to have.
My advice? Take that money and invest a portion for the future. Investing $300/month at 7% will give you over $300,000 in 30 years.
More realistically though, you’ll need to put away some of that money for a new car in the future.
So take $200 a month and save it for a new car and invest the $100 for down the line.
Let’s say you buy a used car that’s 3 years old and, using the method of saving for repairs I just talked about, drive it for 8 years. After those 8 years, you’d have close to $20,000 saved for a “new” used car and all your repairs would’ve been covered.
And, if you invest the $100/month at 7%, you’d have almost $125,000 after 30 years.
No matter how you slice it, monthly car payments are an INSANELY expensive way to pay for peace of mind.
5. Everyone has a car payment
a) 44% of Americans don’t have the cash to cover a $400 emergency
b) 43% of people with student loans aren’t making their payments
c) 38% of households have credit card debt with an average amount owing of around $16,000
d) 33% of Americans have $0 saved for retirement and 56% have less than $10,000
If it’s your burning desire to continue to run among the masses of the painfully financially normal, be my guest.
But I’m guessing that’s not what you want. As Dave Ramsey says, “If you want something you’ve never had, you’ll have to do something you’ve never done.”
So how much car can you afford?
How much car you can afford is entirely up to you. But rather than ask the question, “How much car can I afford?”, reframe the question like this:
How much of my future pleasure, more time with family, killer vacations, a comfortable retirement, being able to travel with those you love, am I willing to give up to drive a hunk of metal that drops in value faster than a nun drops to her knees when busted having a smoke?
It’s CLEARLY not worth it.
So stop being normal and quit telling yourself your car payment is no big deal.
Take control of your money and your life by breaking free from the shackles of debt that come with car payments.
It’s your life!
Do you want help passing on your money values to your kids? Sign up below for my FREE course How To Teach Your Kids About Money!
What’s the most common excuse you’ve heard people give for having a car loan? Add to the conversation in the comments below or on Twitter @method_money or my Facebook page Method To Your Money. You can also find me on Pinterest.