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Being able to afford a financed monthly payment doesn’t mean you can afford a car.
“I doubt the 1/10 rule is practical for anyone except the really rich. I only paid about $23,000 for a very nice Altima in 2019, a 3-year loan with ZERO interest. If you have zero to little debt, a new car isn’t that hard to afford, even at 50% of your annual gross income.”
Opinions are always welcome in my space; it helps me learn. Still, there are a few points I would like to address with this response because I’ve seen a lot of people fall into this same trap and financially hinder themselves.
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A Monthly Payment Is More Affordable Than A Full Payoff
Many people can afford a monthly payment, but the question is, can most people afford to buy a car with cash? Most people can’t.
Trap 1: Too Much Car
More people buy too much car than people who buy just enough car or less car than they need; I mean that it is more common for people to spend more money than they need to on a car.
Trap 2: Interest
It’s unusual to get a car with 0 percent interest – especially since the average credit score is 698 (Equifax). People generally average 3–6% on a car loan depending on their credit score (NerdWallet).
The interest is what catches people in the net. Leading people to pay exceedingngly more than the total value of the car by thousands, sometimes ten of thousands of dollars.
I know a guy today that had a $500 monthly car payment. The car was worth maybe 10 grand when he bought it. By the time he finished paying the car off, he spent $30,000. It made me balk.
If You Won’t Follow The 1/10 Rule, Follow This Basic Rule Instead
The 1/10 rule states that you should spend no more than 1/10th of your gross annual income on the purchase price of a car (Financial Samurai). If you’re looking for a radical savings approach, this would be the one to follow. It will save you so much money in the long run.
Traditional advice suggests keeping total car costs below 15% to 20% of your take-home (net) pay. So if your car payment is 10% of your take-home pay, you have another 5% left to pay for car expenses (NerdWallet).
Using 50% of your gross income to pay for a car is a traumatic habit to keep up for three years. A $23,000 car loan at 0% interest comes out to $638.90/month.
Phew.
There will always be people who can afford this price tag, and there will always be people who can’t afford this. Companies love to make you think you can afford something; that’s why the invention of the credit card came along in the 1950s and car financing in the 1920s.
The expansion of credit in the 1920s allowed for the sale of more consumer goods and put automobiles within reach of average Americans. Now individuals who could not afford to purchase a car at full price could pay for that car over time – with interest, of course (Khanacademy).
Car companies knew most people couldn’t afford to buy a car all at once. Hence, they gave American society the gift of accessibility – at a cost, of course (high interest) – except for the person who inspired this article and got lucky with 0% interest.
But….
Imagine What You Could Do With Your Car Payment
If you’re behind on your savings goal, you probably shouldn’t be investing your money in a monthly car payment. That money could serve you better in an investment account somewhere, earning you more money. Instead, people frequently opt-in to purchasing a depreciating asset that will often be sitting in the parking lot or garage.
Why go 3–6 years spending $400–$1,000 on a car when you can spend 3–6 years putting that money to work? If you continue doing this long enough, you will be able to purchase a car – with cash – without thinking twice about it.
Is there anything wrong with the minimum payment route? Technically, no. But there are always hidden costs. The hidden cost is losing $638.90/month to a car in this person’s case. I hope their investment and retirement accounts are fully padded.
This content is for informational purposes only — not professional advice. Consult a qualified professional before making any major decisions.