The prices of vehicles continue to skyrocket. Though the total amount may vary depending on where you live, data from Kelley Blue Book indicates that the average price of a new car or truck sold in the United States is $33,560. This is likely to increase by 2 percent or more in subsequent years. A four-year vehicle loan at this price with a 10 percent interest rate will generate a monthly payment of $851.00. Depending on where you live, this figure may be higher or lower, and your FICO score may also play a major role in the final tally. Based on these factors, by the time the loan is paid in full, you will end up paying roughly $41,000 for the vehicle. The interest portion of the loan will be $7,296.04.
Assuming you pay off the vehicle in four years, the daily driving cost would be roughly $28.00, not including insurance, gasoline, and routine maintenance. If the same vehicle is financed for six years, the monthly payment would $713.05, the total amount would be $42,783.08, and the interest would increase to $9,223.08. This means more money for the lender and less in your pocket.
Should you spend this much on a vehicle?
For the twenty-something person or someone who is trying to get ahead financially, spending $851.00 or even $713.00 a month on car payments is somewhat reckless. This amount is equivalent to a mortgage note in most states in the country. In fact, unless a person is financially independent where money is not a concern, paying any amount higher than $350.00 a month for transportation is financially irresponsible. This is particularly true if he or she has no stable cash reserves for emergency or other immediate needs.
Depending on the individual, the situation could get worse. For example, if you aspire to drive a luxury automobile, like most people, the cost could go higher. BMW prices start at $30,025 for the entry-level 1 Series and go up to $103,225 for the M6 models. Mercedes-Benz starts at $34,475 for their entry-level C-Class and goes up for more advanced models. Although these vehicles are known for their dependability and resale value, I would suggest you control your urge to own one unless you can comfortably afford the price.
A savvy approach to car-buying
If you intend to get ahead financially, I would suggest a moderate vehicle price between $10,000 and $15,000. This will keep your monthly payment in the high two hundred and low three-hundred-dollar category. Though you may have the urge to buy something more expensive to impress other people, the goal should be to have dependable transportation that will take you to work and back without breaking down.
As you search for an automobile, look for a make and model with a good track record of safety and reliability. When you find one, follow the recommended factory maintenance schedule to a “T” and keep the vehicle for as long as it will deliver safe and comfortable driving services.
While considering your options, avoid getting into vehicles that are designed for style and speed such as Camaros, Firebirds, Mustangs, and others. In addition to their high costs, they depreciate quickly. For instance, a Chevrolet Camaro will cost you between $26,000 to $30,000 depending on the model. One year later, the resale value will plunge by 28 percent; the second year, it will drop by 41 percent; and the third year of ownership, its value will decrease by 49 percent. Before long, you will be upside down in the vehicle, meaning owing more money than the car is worth.
The goal is to spend less on a safe, reliable vehicle, which would be an ideal purchase. However, such action requires discipline and prudence. Often, this means disregarding what people say, think, or do about vehicle purchases, and do what is financially responsible for your situation. For example, if you spent less on a vehicle that takes you to work and back, you’re financially ahead of the other person who spent much more for the same purpose. The other half of the scenario is to stash away the extra money you saved during the purchase.
Finally, avoid making a cash down payment on a vehicle. KEEP your cash and finance the whole thing.
If you apply these ideas to your next vehicle purchase, you’ll be ahead financially.
To learn more about your financial options, consider reading my new book: Pennies to Power: How to Use Your 20’s to Gain Financial Independence for Life.
Thanks for reading.
What are your thoughts?
Do you think it’s a good idea to change vehicles every four years? Do you think it’s financially wise to keep the vehicle for as long as it will run safely and dependably?