Can I Afford a New Car?

I recently visited Athens, Georgia, for the first time to attend a concert. While driving through the rolling hills, we passed several car dealerships with large price stickers displayed across the windshields.

The first vehicle I noticed was listed for $25,000, which seemed reasonable. Next was a used BMW for $52,000. Then I saw a used Chevrolet 1500 priced at $89,999. Regardless of the year or mileage, that price caught my attention.

It got me thinking about today's car market and how much money people are committing to an asset that typically loses value over time.

The 20-4-10 Rule

When you're deciding whether you can afford a vehicle, the 20-4-10 rule is a good place to start:

• Put at least 20% down

• Finance the vehicle for 4 years or less

• Keep your total monthly vehicle expenses to no more than 10% of your gross (pre-tax) monthly income

  
  

Let's use that $90,000 truck as an example.

A 20% down payment would be $18,000, leaving a loan balance of $72,000. At a 6% interest rate (approximately the average at the time of writing) over 48 months, the monthly principal and interest payment would be about $1,691. That's before sales tax, insurance, maintenance, and fuel.

Following the 20-4-10 rule, you would need to earn roughly $202,000 per year for that payment to fit comfortably within your budget.

Those numbers surprised me, so I started looking into what the average American is actually paying.

Today's Average Car Payments

According to LendingTree, the average monthly payment for a new vehicle has climbed to $767, while the average loan term has stretched to 68.9 months.

Longer loan terms reduce the monthly payment, but they also increase the total amount of interest paid over the life of the loan. In many cases, they simply make an expensive vehicle appear more affordable than it really is.

The Opportunity Cost

One statistic stood out to me.

According to CNBC, people earning $35,000 or less have a higher average monthly car payment than those earning more than $175,000. Higher interest rates for lower-income borrowers certainly play a role, but it also highlights how expensive vehicle purchases can put additional strain on a household budget.

There's nothing wrong with wanting a newer, safer, or more reliable vehicle. Just be sure you understand what you're giving up in exchange. Every extra dollar spent on a car is one less dollar available for building an emergency fund, investing for retirement, saving for a home, or reaching other financial goals.

Buying a vehicle is one of the largest purchases many people make. Taking a few minutes to run the numbers before signing the paperwork can make a meaningful difference over the long run.

If you have questions about a major financial decision or would like a second opinion, feel free to reach out. We'd be happy to see if we're a good fit.

Alpha Financial Management is a fee-only fiduciary financial planner based in Savannah, GA, helping individuals and families with retirement planning, investment management, investment advice, and tax planning. We work with clients locally and virtually throughout the United States.