How much should you buy a car for?

Go against accepted wisdom and prioritize your desires when you buy a car.

It is hard to put a price on safety, convenience and comfort. Yet, those are the three most important things that we think about when we consider public transport versus buying a car; or buying one brand of car versus another; or buying a used car versus a leased or new car, or a combination of public and personal transport! (Some people live in their car! That's a whole different topic). The fourth factor, which is almost equally a consideration is 'desire', which is patently unquantifiable. This last factor often brings into the equation the method of payment: in full, through a loan, or lease! 

Desires are important to address. Even though, in the hierarchy, it may come third after needs and wants, what is life without desire? A lot of people are partial to this factor (which explains why there is over $2 trillion in outstanding auto loan debt in the United States!).   

It's unrealistic and even inappropriate to advise people to ignore desires. A pragmatic approach would be to consciously account for it. This is a larger topic, because people have many needs, wants, and desires, and have to account for all of them. Those who want a luxury car may also want other luxury things (like high-quality watches or bespoke shoes), or to save up for a secure future (like paying off a house, or saving for their kids' college or retirement). It's important not to make a decision to buy a car in isolation of your other needs, wants, and desires. But here, I talk about how to buy a car keeping in mind what you need, want, and desire in your car.

A lot of people ask themselves three questions to make their car-buying decisions. 

1) Do I need a car? (Or do I need to replace my car with a better car? Or do I need a second car?)

2) What is the car I would like to buy? 

3) Can I afford that car?

The miracle of consumerism is you can always afford whatever car you set your eyes on. There is always a salesperson ready to pitch you a high-interest loan, and make it sound like the greatest deal on the market! 

If you had a budget for $5000 to buy a car, you may consider a $20000 car just because of the loan plan. You could end up spending ten times more than you initially intended! The value of the car decreases every year, and yet, you are stuck paying the same amount of monthly payment on it (with or without interest, and often high-interest!)

I would therefore urge you to ask yourself a different set of questions.

1) Why do I need a car?

(Or why do I need to replace my car with a better car? Or why do I need a second car?)

A lot of people mistake their wants for needs, so when you ask yourself this question, it is important to list your 'whys' in the order of priority. Here is an example of a "need": "I need to cut my commute time to work by 50%. It will help me save $300 per week on after-school care for my children. It will allow me to work a second job."

Here is an example of a want disguised as a need. "I need a new car in X brand and Y model, because it is the most reliable, safe and fuel-efficient car in the market among non-luxury mid-range cars!".

And here's an example of desire. "I want a car in X brand and Y model because I love the aerodynamic design of the car. In fact, I love the CEO's vision for the company and what this car stands for!" 

These are all valid reasons. If you love a car for no reason at all, that's valid too. But, it's important to identify needs, wants and desires, and put some numbers to them! (The numbers can be financial, or weighted by importance or rated by perceived personal value)

2) What do I 'need' the car to have? 

(Or what does my current car not have that is a 'need'? Or what do I need a second car for, and what do I need it to have?)

It's important to list these before you go to the car dealership because salespeople are very good at pitching to your desires. Those 360-degree surround-view camera systems that you never knew existed become the safety feature you cannot do without. If something is truly a desire, it needs to come from within. And often what comes from within is reasonable! It's external influences that distort our desires. So list your needs, wants and desires, and then look for a car that fits them!

Examples of needs: mileage, or specific safety features. Examples of wants: heated seats and steering, or built-in navigation systems. Examples of desires:  keyless entry, or rear entertainment units. You need to know the value of the car that fits your criteria. Study the local market. Look at various options. Compare the valuations over a period of time. Use valuation guides (eg: Kelley Blue Book, Edmunds, NADA), Consumer reports, third-party appraisers. Many factors affect the value of a car. If you are not careful, you might end up paying more than 50% above a car's value! (Some people even willingly overpay because they have their eye on a car. But if they had just shopped around, they could have got it for the right price).

3) Have I saved up for it?

(Or, how long will it take me to save up for it? and what do I do in the meantime.)         

Let's start with the simplistic advice and then dig deeper. 

A car is a depreciating asset that loses value over time. Some cars hold value better than others and have a lower depreciation. You want to account for that, but in the end, you are buying an expensive asset that will lose value! So, the most simplistic advice suggests that

1) If you buy your car in full,  you need to spend less than 10% of your household's total "net worth" on your car. (Some finance advisors say 10% of your annual income, but income does not account for your overall financial picture of assets and liabilities. You could be making a six-figure salary, but your current debt could be double your income). So, if your net worth is $150000, it would be judicious to spend less than $15000 on a car!  

Here are some things to factor in when you calculate the "out-the-door" cost of buying the car. Selling price, sales tax, documentation/registration/title fees, interest rates (based on credit score, loan duration, down payment, used vs new car), insurance, service plans, repairs, delivery cost, extra protection, cleaning, annual inspections, anti-theft devices, dealer-installed options, Fuel and motor oil, and other hidden costs. You will also want to account for things like depreciation (by talking to a mechanic about the car's longevity). Don't also forget to calculate things like parking costs and carpooling. (Parking may also be a consideration for public transport users. Where I live, the metro parking fee is $5 per day. The monthly reserved parking fee is $45-$65 and is paid in addition to the daily parking rate). Remember, every fee and feature is individually negotiable. So sit on every number for as long as you need to get the best price!

2) If you choose to take a loan, then choose a downpayment that will allow you to pay no more than 10% of monthly take-home pay on a loan (for less than 5 years). Typically, every $1000 in the down payment reduces your monthly payment by $15. You will want to use an auto loan calculator to get the exact number. You will want to budget another 10% monthly take-home pay for recurring costs like gas, maintenance, insurance, and car-related emergencies. Keep in mind that this is only a suggestion. Your specific situation may mean you cannot afford this 10% monthly! It may be that you have high medical bills, or daycare costs. So you want to sit with all your numbers before you arrive at a comfortable percentage (preferably less than 10%) that accounts for all costs.    

If you are going the loan route, get your financing preapproved, and arrange for your bank or credit union to finance it before visiting the dealer. Your interest rates will be dependent on many factors that have to go with your financial health (credit score, debt-to-income ratio), lender (payment terms), and also the type of car you are purchasing (eg: new vs used, age of the car). Never get a loan through dealers because they will only present you with offers that earn them the most commission. 

When you come in with preapproved financing, you are also negotiating from a position of strength. Dealers usually use their "sticker price" or MSRP as the starting point of negotiations. But, if you look like you've done your homework, you will negotiate from the "invoice price". And don't ask the dealer for the invoice price. Find it through vehicle valuation companies like Kelley Blue Book, Edmunds, NADA or Consumer reports. 

If you are leasing a car, don't just look at the downpayment and monthly payment, but also the lease money factor (interest rate), sales, State and other taxes, the drive-off fees,  the cost of the car over the lifetime of the lease, the gross and adjusted capitalized costs (car's selling price with all the fees and rebates), residual value (or the value of the car at the end of the lease), the disposition and early exit fees (this may include not one but several different fees!), and other end-of-lease fees and penalties, buyout options, lease-trading options, mileage limits, and repair plans. Every fee is individually negotiable. And just like with a loan, use the invoice price of the car as the starting negotiation point (not the monthly payments)    

Whether you buy a car in full, take a loan, or lease a car, you don't have to stick to one dealer. You want to call as many dealers as time permits you and get the best offer! 

You don't have to buy the car right away. You can adjust your budget and monthly saving goals, and figure out a temporary transport plan until you can buy your car! You can use public transport, or buy a cheap used car until you've saved up for a better car, you can work a second job, or improve your credit score. There are a million ways to make financially sound decisions if you just allow yourself to look into them. Urgency is a psychological trigger that needs to be managed with rationality! Talking to a loved one can help put things in perspective.

OTHER FACTORS:

Now let's dig deeper and look at other factors, so that you can choose the right car for yourself. 

1. Where do you live?  

If you live in a city where public transport is reliable, more convenient than a car, your car usage may be minimal. But, city-driving is also harder on a car. The roads have speed bumps and potholes, you have to stop-and-start your car often. It gives your car (suspension, transmission, engine, brakes etc) a full workout.  

If you live in a rural area, you may be more car-dependent, and may spend more time on the road, but the highways are smoother. Rural driving is not without its dangers (more wildlife, livestock, falling rocks, and weather-related hazards).

You also want to consider the weather if you live in a place that sees extreme climates.

2. How much do you drive? 

Even though those who live in a rural area may be more car-dependent, not all rural and urban areas are equal. In some States, Americans drive more than twice as many miles in urban areas than in some rural areas. In some other States, it is the other way. A lot of it depends on what drives the economy, and the work-culture.  

3. What type of job do you have? 

An average stay-at-home parent spends more than an hour driving. Whereas, a doctor who works in a hospital close to home may spend less than an hour on the road! And then, there are professions where a person spends practically the entire day in the car. You may be living a suburban life where you are car-dependent, but you may be traveling out-of-State on work, and most of the time, your car may either be sitting in your garage or an airport parking lot. If this is the case, you may not need the best commuter car.

But if you are a construction worker, or a door-to-door salesperson, or are working a delivery job, your car might, in fact, double as a glorified toolbox or storage unit! Your car is your "resource"! You will need it to be heavy-duty!

How much one uses a car determines how much one spends on fuel and maintenance. The other factors that affect wear-and-tear of a car are weather, traffic and road conditions.  

4. What specific needs do you have? 

You could be a person with disabilities who needs specific adaptations in your car. You may have a large family, and seating and storage space may be your biggest priority. You may be a first-time driver with a need for compact car that is easy to maneuver and park. Or you may be living in an apartment with a small parking space that is both narrow and has a low ceiling. Or you may be a car enthusiast who likes working on or modifying your car.

The way you account for these four factors is to start with the cheapest car (used or new!), and assess how many of your needs, wants and desires it accommodates, and then work your way up to the next brand or model... and keep going up and up until you hit the cap of your budget.

At every point, when you see yourself saying "This car does not have X that I 'want'", challenge it and negotiate it down to a need. For instance, if you "want" a built-in navigation system, ask yourself if you can buy a high-end portable GPS unit, or use a car phone-mount. You can even talk to your dealer about upgrading to a built-in unit in a few months! Once you've saved up the money, the dealer will install the GPS in its dedicated GPS unit or replace the head unit with a GPS unit. So you can buy the car you "need" and slowly upgrade it "one want and desire at a time"! More often than not, you can have the car you "need" today. Your desired car is only some quantifiable time away!

Read more:

1. No Car. No. Public Transport. This article talks about what to do if you have no car, and no access to public transport.

2. 10 Alternatives to Payday Loans. The article talks about 10 infinitely better alternatives to Payday loans and other high-interest loans.