Car purchase rule of thumb

[LivingAlmostLarge]

We're a conservative bunch here. But I don't have a rule of thumb for this, but someone asked me if there was a rule of thumb for how expensive a car can/should you buy?

I've always wanted a specific car for a specific purpose and bought it. So I haven't had a rule of thumb. It just seemed very practical that I buy something that we needed and would fit our lifestyle. Then the adjustment was used and age because I didn't want to spend to much. But I don't think we personally followed any rules.

But truth be told most people I met just buy whatever car suits their fancy and they have no rules of thumb. But since cars seem to be getting more expensive, my eyebrows are raised at spending that much. I may have too next time around but I was wondering if you guys read or had a rule of thumb for car buying?

And before you say I'd never, have you guys seen the car prices in the last 2-3 years?

[kork13]

The only ROTs I'm familiar with relative to car buying are: (1) never finance on more than a 3-year note -- if you can't afford that payment, you can't afford the car. (2) Whenever possible, target a slightly used (1-3 y/o) car.

Realistically, I generally align with your mindset -- Assess your priorities & let that guide the purchase. Ask yourself WHY you need the new car, and WHAT you need it to do for you.

Consider the quantity of people and stuff you (realistically/frequently) need to move around... the environment you drive in (city, dirt roads, narrow side-streets, etc.) ... any non-negotiable features you require (hybrid/electric, tow capacity, AWD, stick shift, max price, etc.)... and just keep defining what's important to you, and how important it is. Then it's shopping around, and finding the car that actually suits your needs. Check a couple years older than new to see if they'll work. Then work out the best deal you can get.

I'm not good at car-buying. So I just go into it with all the information I can, knowing exactly what I need & what I'm willing to spend. Though I haven't looked at car prices in the last few years, so I have a feeling that I'll face sticker shock the next time I need to buy one.... I'm moving to Japan this summer, so I'll need to get a car out there, but it'll likely just be something basic, used, and functional -- only needs to last me the 2-4 years I'll be living there. The next significant car I'll be buying will be on my return from Japan... But maybe by then I can simply buy whatever I want & not worry too much about the cost.

[disneysteve]

The traditional rule is that your payment should be no more than 10% of your monthly income for no more than 3 years. Now if only more people actually followed that rule.

if you’re paying cash, use that same formula to come up with a lump sum amount.

[Petunia 100]

The traditional rule is that your payment should be no more than 10% of your monthly income for no more than 3 years. Now if only more people actually followed that rule.

if you’re paying cash, use that same formula to come up with a lump sum amount.

Yikes, I am way over that one.

[ua_guy]

It's discussed widely that new car prices are averaging almost $50,000 in 2023 and it's been on an upward trend for several years. Automakers are licking their chops, this is great for them. More crappy tech, higher margins.

The "old" rule of thumb is no more than 10% of gross household towards a vehicle payment. Some say no terms longer than 36 months but I see no longer than 60 months referenced more recently.

If the median household income in the US is still about $71k annually, that means a monthly maximum payment of about $590. Assuming no interest, which is incorrect, that's a maximum sale price including taxes and fees of about $36k on a 5-year loan or just $21k on a 3-year. That also assumes nothing down, which can definitely alter the payment.

[disneysteve]

Yikes, I am way over that one.

It can definitely be adapted to your situation. It stems from the big picture that housing should be no more than 25% of income and overall debt shouldn’t exceed 35%. If you have no mortgage, for example, or a smaller one, then you can spend more on the car.

it also depends on your total income. Rules of thumb are generally aimed at the median folks. If you have a higher income with more disposable income available, you can spend more than the rule of thumb.

[disneysteve]

If the median household income in the US is still about $71k annually, that means a monthly maximum payment of about $590. Assuming no interest, which is incorrect, that's a maximum sale price including taxes and fees of about $36k on a 5-year loan or just $21k on a 3-year. That also assumes nothing down, which can definitely alter the payment.

And $36,000 gets you a wide selection of very nice cars. That’s thousands more than we’ve ever spent on a car. Last purchase was in November and I think we paid about 29K and that was a splurge (and we earn a lot more than 71K).

[ua_guy]

And $36,000 gets you a wide selection of very nice cars. That’s thousands more than we’ve ever spent on a car. Last purchase was in November and I think we paid about 29K and that was a splurge (and we earn a lot more than 71K).

Absolutely. The rule of thumb is being squeezed by new car pricing, but there are still plenty of great options, new and used.

I mentioned in another thread, my husband and I were accompanying my father in law with his purchase of a new truck. What amazed me about wandering the lot was the number of 60, 70, 80, 90!!! -thousand dollar pickups. Raptors, King Ranch kinda stuff, big heavy duty, crew-cab family-style pickups with plush leather seating and huge glass roofs, so heavy the EPA doesn't even give them a fuel mileage rating.

I see people rolling around in these things ALL THE TIME, and I just shake my head. Sure, these are in the realm of relative affordability for higher income earners, but these are not average family pickups. But they are sold as such! 84 months loans, financed wheel/tire packages, etc. Scary!!

[ua_guy]

I just checked what (best) rates my bank is quoting. Yeowch.

5.74% on a new car (2021 and newer)

6.74% on used, model years 2013-2020.

[Fishindude77]

Don't buy a car you can't pay cash for.

[disneysteve]

Absolutely. The rule of thumb is being squeezed by new car pricing, but there are still plenty of great options, new and used.

This! So many people get focused on buying new and go deep in debt in the process. Buy a 2 or 3 year old car that fits your budget and get so much more for your money. DW's "new" car is a 2019. DD's "new" car is a 2018. They both were purchased in November 2022. My car is a 2018 and I got it in September 2020. Once you've had it for a bit, nobody knows or cares if you bought it new or used.

[bjl584]

I bought my truck in 2017. It was a year old at the time. It's been paid off for coming up on 3 years.
I'll keep it until it is unreliable

[jenn_jenn]

This! So many people get focused on buying new and go deep in debt in the process. Buy a 2 or 3 year old car that fits your budget and get so much more for your money. DW's "new" car is a 2019. DD's "new" car is a 2018. They both were purchased in November 2022. My car is a 2018 and I got it in September 2020. Once you've had it for a bit, nobody knows or cares if you bought it new or used.

I never expected to buy a new car for this reason! Always have purchased my cars at that 3 year mark to let someone else pay the depreciation.

Until last year.

The used car market is still insane and the model of car we were looking for was selling for just a few thousand cheaper than a new model. At that price difference, the decision to buy new was a no brainer for us. Definitely something to consider in the current market.

____

The rule of thumb I’ve heard from Dave Ramsey is that you shouldn’t collectively have more than 50% of your gross income in things that have motors (cars, boats, bikes, etc).

That has always felt way too high to me. We are well well below that and we pay cash for our cars.

[myrdale]

Don't buy a car you can't pay cash for.

I agree with this in theory, but in practice I will admit it is not implemented.

I've posted about it in other threads, but two years prior to purchasing my current truck, I started a savings account at a local credit union. Every month I would put $1-2k in it. At the point I made the purchase, that account was about $4k short of what I needed so I took out a 72 month loan. Over the next three months I cut checks for $20k, $10k, & $5k then it was done.

I got into it with my mother once because one of her friends had purchased a $40k vehicle and was having a hard time with the payments. I said she should have paid cash, to which my mother was really snippy about. But the other part of it is the friend should have purchased a less expensive car. A $15k vehicle could have been paid off in short order considering what she was paying for the new $40k car.

[disneysteve]

I never expected to buy a new car for this reason! Always have purchased my cars at that 3 year mark to let someone else pay the depreciation.

Until last year.

The used car market is still insane and the model of car we were looking for was selling for just a few thousand cheaper than a new model. At that price difference, the decision to buy new was a no brainer for us. Definitely something to consider in the current market.

Rules of thumb can definitely be impacted by market conditions. What has happened to the car market, both new and used, in the past few years due to the pandemic is pretty unprecedented. Suddenly new cars were scarce due to factories shutting down and supply chain disruptions, especially to the chip market. That spiked the demand for used cars skyrocketing prices. And new cars were routinely selling for thousands over MSRP because they were in such short supply. Very unusual circumstances.