Living in a large city without reliable public transportation like Atlanta or Los Angeles makes having a car a necessity. Going to work, dropping your kids off at school, and running simple errands would be incredibly inconvenient if you didn’t have a car to get around. The price of new cars has risen an average of 32% since 2018, making it incredibly important to know how to responsibly purchase a new vehicle without putting your financial livelihood at risk. 

Standard budgeting advice says you shouldn’t spend more than 10 percent of your monthly income on car-related expenses. This means any car payment, maintenance and repair bills, insurance, and optional modifications should be taken into account when assessing the true affordability of a vehicle. Cars are being built with more technology that requires specialized tools to complete even simple maintenance tasks like oil changes and battery replacements. Over time, this cost unfortunately gets passed along to you, the consumer. 

Buying a new car when you can’t really afford it is one of the biggest and most common financial mistakes people make. It’s estimated that more than 60% of American households currently cannot afford to buy a new car, but that doesn’t stop people from constantly driving to car dealerships in one vehicle and leaving in a completely different one. The average monthly car payment across the US has risen to $751 for new cars and $532 for used cars while the average auto loan term is 67.9 months for new cars and 67.4 months for used cars.  

The price of new cars keeps climbing higher and higher with many automakers producing fewer options that are less than $20,000. Even older, used vehicles are seeing higher price tags and interest rates. The average auto loan interest rate at the end of 2023 was 7.18% for new vehicles and 11.93% for used vehicles. Rates unfortunately haven’t cooled off even though we’re almost halfway through 2024. Georgia comes in as one of the states with the highest average interest rate for new car loans at 8.33%. 

Of course, the specific rate you end up with is determined by your individual credit score, but playing the car payment game is a slippery slope into wasting a lot of money on a depreciating asset. One of the biggest money pits and financial burdens is having a car payment without a plan. Since this economy is not set up to protect you or your money, you have to make Smart Money Decisions every step of the way to get ahead. 

Let’s just say you have no choice but to buy a different vehicle from the one you have currently. Maybe there’s an expensive issue that just doesn’t make financial sense to repair or maybe it was totaled in an accident. The very first step is to figure out exactly how much you can spend on a car. Ideally you’d want to save up to purchase a vehicle in cash and be done with the transaction if at all possible. 

With the average transaction price of new vehicles pushing $47,401, it can be incredibly daunting saving up that much cash quick enough to actually purchase a vehicle. Some people would never be able to afford that much car in cash, but thankfully you don’t have to buy a brand new car just to get a safe and reliable vehicle.

If you can only afford a $5,000 or $10,000 car, take pride in being financially free and owning your vehicle outright. Car payments can turn into death by a thousand lashes and drown you slowly over time. It can be the number one reason why you feel like you don’t have any money immediately after pay day. While you definitely work for your paycheck, unfortunately sometimes it’s spent well before the money hits your account each month. 

The make, model, year, and mileage of a vehicle are important, but not more important than the final out the door cost that you’ll have to pay. It’s important to do your research before you even step into a dealership to avoid getting swindled by all the bells and shiny whistles attached to new, expensive cars.

There are many luxury brands that offer fancy amenities that at first glance seem worth it until you break down the fully loaded cost of ownership. Usually insurance rates are higher, it requires a more expensive grade of fuel, and there’s a stiffer barrier of entry. There’s also an unspoken luxury tax where people may make assumptions about your income level solely based on the vehicle you choose to drive. 

Car salesmen and finance managers are trained to upsell you into a more expensive model and keep you at the dealership for hours to swindle you into a car deal that benefits the dealership, not you. In some instances, they actually prey on people’s weaknesses and take advantage of people in poor financial situations. It’s important to avoid putting yourself in those situations at all costs. Just because you can finance multiple thousands of dollars for a vehicle, doesn’t mean that’s the smartest decision long term. 

Your personal budget should be the driving force on the type of car you purchase. Once you sit down and can say “I have x amount of money saved up for a car”, then you can pick your preference from the options within your budget. It is never under any circumstances okay or a good idea to stretch yourself thin just to afford a car. 

I know I’ve already said it, but I just need to reiterate it. The best way to buy a car is in cash. That way you don’t have to owe a bank for an item you use daily or sacrifice making headway on other financial goals like saving 25% of your income for retirement. It also gives you more flexibility and freedom to manage your money more effectively instead of it flying out the window as soon as you get it. 

Unfortunately, sometimes people bite off a little too much car than they can handle. If you feel stuck in a car loan, there are ways to get out of it, but it will require hard work and dedication. If the amount you owe on your car loan is more than what the vehicle is worth, that’s a phenomenon called being underwater. In a sense, you’ll lose money no matter what you do. Reducing the risk profile and limiting the amount of money you lose is the key. 

One option is to take out a personal loan for the difference in amount owed and the value of the vehicle to get completely out of the high interest loan. Most personal loans will have a much lower interest rate than an auto loan, helping you to bring down the outstanding balance much quicker than paying off a depreciating asset. 

Financing vehicles ultimately negatively impacts your credit score because it can lead to late payments, potential repossessions, hard inquiries, and holding a large amount of optional debt. Despite being incredibly easy to get into, it’s not easy to get yourself out of a bad financial situation caused by a vehicle. Usually the process involves a lot of time, money and can often lead to crippling anxiety. Don’t let your emotional attachment to a car stand in the way of achieving your future financial goals and dreams. 

If you enjoyed this episode, let me know by giving this video a thumbs up, leaving a comment, and subscribing to my channel. I’ll see you in the next episode! 

Signed, 

Jessica Marie