Over the years I have seen quite a few people declare bankruptcy, drop out of college, move back with their parents etc. etc. because they bought a new car. Not many people know the actual cost of what it takes to afford, maintain and insure a new car. It shocks me at the ease of which creditors give tens of thousands of dollars to new car owners who are living right on the cutting edge.
I just did a search on the net “How much car can I afford” and found nothing but bad advice. Here are some of the gems I found.
1. >>>>>“In figuring out the purchase of a new vehicle, the CCCS recommends keeping your debt-to-income ratio below 15 percent. If your figuring shows a ratio already higher than that, CCCS recommends that you shouldn't attempt car payments at all until you pay off at least some of your credit bills” Add up all your monthly installment payments such as car payments and credit card payments (do not include regular living expenses like rent, mortgage, or utilities). Divide the total by your monthly take-home pay, after taxes and other withholdings have been subtracted. The resulting percentage is your debt-to-income ratio.” >>>>>
This is insane. This is terrible advice. “DO NOT INCLUDE REGULAR LIVING EXPENSES LIKE RENT, MORTGAGE OR UTILITIES” ??? You got to be kidding me. I guess the writer expects my mortgage and utility company to stop sending me bills
or my landlord to forgive rent payments while I make car payments!! Living expenses have to be included in the equation of buying a new car or else you will run out of cash real fast and start skipping payments. Madness.
2. Here’s another one I found to determine how much car you can afford.
Highest payment you can afford $300.00
Cash down payment: $3,000.00
Trade in: $3,000.00
Interest rate 6.9%
Loan term 60 months
Loan amoun $5,186.76
Based on this information, the most expensive car you can buy is $21,186.76.
This is insane. There are many so called calculators like this which do NOT take into account your current living expense or personal debt. Nor does this calculator take into account insurance, gasoline, tolls, repairs, tickets, fees, vandalism and parking. There is no question in my mind that this calculator and others like it are a recipe for financial disaster. How can a person tell what is the HIGHEST PAYMENT THEY CAN AFFORD? You will find in many cases the $300.00 is ALL THE DISCRETIONARY
INCOME THEY HAVE IN THE MONTH!!
No wonder we have so many bankruptcies in this country with advice like this. It’s a pity the humble bicycle does not fit into any of these equations as an alternative means of transportation.