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Financing a car does not = You can afford the 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. A new car isn’t that hard to afford if you have zero to little debt, 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.
Financing Is “Affordable”
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 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). Depending on their credit score, people generally average 3–6% on a car loan (NerdWallet).
The interest catches people in the net-leading people to pay exceedingly 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 ten grand when he bought it. By the time he finished paying the car off, he had spent $30,000. It made me balk.
If You Don’t Follow The 1/10 Rule, Follow This One
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). This would be the one to follow if you’re looking for a radical savings approach. 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 of keeping up for three years. A $23,000 car loan with 0% interest comes 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 the 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 invest your money in a monthly car payment. That money could serve you better in an investment account, earning you more money. Instead, people frequently opt to purchase 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. In this person’s case, the hidden cost is losing $638.90/month to a car. 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.