How Much Car Can I Afford?

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Originally published on March 5, 2018

Article QuickTakes:

• Seven ways to figure out how much car can I afford
• Five reasons not to stretch my car budget to the brink
• Decreasing my costs of car ownership

How much car can I afford? 

The question hovers over every automobile purchase like a hot air balloon that never quite comes in for a landing.

What seems like a simple matter of dollars and sense — don’t overspend your take home pay on car expenses — some financial experts say is actually much more complex.

Asking yourself “how much car can I afford?” is a question that can inform one of your most meaningful purchases. A car isn’t just a machine or a means of transportation, it can serve as a reflection of who we are, a status symbol, a member of the family and a slice of the American Dream — complete with cupholders.

In his book “Engines of Change: A History of the American Dream in Fifteen Cars,” Pulitzer Prize-winning journalist Paul Ingrassia suggests that ever since General Motors introduced the LaSalle in 1927 as a tri-colored, sleek alternative to Ford’s basic black Model T, the U.S. consumer has engaged “in a tug of war between the practical and the pretentious, the frugal versus the flamboyant.”

The head vs. the heart.

So when you ask “how much car can I afford?”, it’s important to follow your head and calculate all of the costs.

We can help with that, but don’t be surprised if your heart complicates matters.

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SEVEN WAYS TO FIGURE OUT HOW MUCH CAR I CAN AFFORD

Most buyers start determining how much car they can afford using the sales price. That seems logical, but cars also come with a trunk full of associated costs:

• Tax: Taxes can range, depending on where you live
• Title and license fees: Fees include license and annual registration, and the amount varies by state
  
• Financing: Interest rates vary based on credit scores and the type of car
• Insurance: Driving record, location, and car models affect the cost of your policy
• Fuel costs: Gas prices fluctuate; consider MPG ratings and average miles you drive
• Maintenance and repairs: Replacement parts for luxury imports can be costly
• Depreciation: The difference between what you paid for your vehicle and what it’s worth as it ages

Most car owners know they’ll have to foot the bill for gas and insurance, maintenance, and repairs. However, very few owners may add up all of the projected costs to determine: how much car can I afford?

The problem when determining what works for your finances is that the heart may want more — more options and more luxury. Many Americans are stretching their budgets to buy new vehicles with higher loans and longer pay-off periods. This approach can make it more difficult to afford ownership costs.

Why I shouldn’t stretch my budget to buy a car

The U.S. is a nation of strivers. Big-ticket purchases such as a house or a car have become signposts of financial progress. But try to keep in mind that your focus is how much car can I afford, not starring in a reality series called Keeping Up with the Capitalists (even if it feels that way sometimes).

• No matter how much we love them, cars are not investments: Most new cars lose significant value in year one, and like a leaky tire, just keep slowly deflating from there. Depreciation can be difficult to see because it’s not money you are paying out of pocket, like fuel costs and insurance. But when it comes time to sell your vehicle, if it’s worth less than you paid for it, or less than you still owe, it will sting. (Find some suggestions on how to turn the tables on depreciation.)

• The money you save on a car can grow in other areas: You can invest that extra $10,000 in a house or in a college fund where it has a chance to grow in value.

• That rainy day is a real thing: Not every American has at least $1,000 saved to deal with an emergency. A broken water heater or a health crisis can plunge a family much deeper into debt.

• It can be tough to escape the cycle of debt: If every dime you have coming in is already spent, you’ll forever be walking the financial tightrope. You don’t want to risk losing your vehicle.

• Owning a car is a marathon, not a sprint: Auto loan terms may last for several years. Within this timeframe, your answer to “how much car can I afford?” may look different between now, two, three, or six years. Life happens. Jobs change. But a car that fits comfortably into your budget can afford you more financial flexibility.

Kelley Blue Book’s calculator estimates the projected five-year cost of just about any car on the market. It compares vehicles to help you better determine how much car you can afford.

HOW TO LOWER MY COSTS OF CAR OWNERSHIP

The costs to own a car can add up quickly. Consider these budget-friendly tips to help you save:

1. Shop around for insurance rates: Insurance is one of the highest ongoing costs for car owners. When you shop around to compare policy deals, you can find great savings.

2. Buy a used car. Let somebody else take that initial depreciation dings on a new car. Also, insurance rates are typically lower for a used car. But if you plan to finance, be aware that used cars can come with slightly higher interest rates.

3. Put a premium on fuel economy: Gas is a significant cost for car owners — there are peaks when prices per gallon can balloon. Many hybrids have come down in price and electric cars are eligible for thousands in tax credits.

4. Shorten the length of your loan and put more money down: The less you finance, the less you pay in interest. Consider putting 20% down and taking out a 48-month loan. You may pay more money upfront and per month, but you can save in the long run.

5. Improve your credit score: If you’re not in a rush, adding points to an average credit score can save you money on financing rates.

Aligning your head and heart to realistically address what works best for your finances can be a challenge. There are multiple factors to take into account, and they may change over time. Assessing the question of “how much car can I afford?” from all angles may help you navigate into car ownership without the regret of a major life purchase.