How Much Car Can I Afford?

We need a new larger vehicle. My truck is plenty big enough, but it's a rattle trap at 220k. Other cars are too small. I don't want to get into what kind of car, but it needs to be new enough not to strand us in the middle of the desert, fast enough to cruise at 80mph, and big enough to haul a weeks worth of stuff to the beach with multiple bicycles on the back and a cargo box on top.

Fancy new cars have always been superfluous to me, but with kids and high speed highways, safety becomes more a factor. 

Here's the basics: 

$1500 mortgage, $300 in utilities and media (water, sewer, trash, gas, electric, internet, streaming).

$800 for childcare (not consistent, but aiming high, get a few grand back in tax refund every year)

$500 for groceries. 

No other debt. 

$6000 per month net income. (We both contribute on the higher end of 401k and HSA)

We're big savers and could buy most reasonable vehicles all cash, but we'd rather keep that for a down payment on a future house or home addition. A car is more immediate. 

Concerns: 

- Our current 3 vehicles have no value, so trade-in would be pointless. 

- New vehicles have expensive insurance, likely costing twice what our most expensive vehicle is currently. 

- New vehicles have expensive windshields, we have replaced a windshield every two years on our vehicles since moving to AZ 8 years ago. That's about 4 total for three vehicles. 

- Interest rates on new vehicles are high, and AZ charges a hefty dealer tax on top of title and tags. Used would save significant dollars, but limit inventory. Could we buy a used car, then get a loan?

How much car can we afford?

Good luck

Budget guys say 10% of net or $600.  

You're spot on with the mortgage- 25%

Is that $600 including insurance?

My wife and I have a few rules. We keep the total value of all of our rolling stock at less than half your annual income. We also either pay cash or aim for payoff in two years or less. I just bought an 11 year old Toyota truck with 195k miles for cash. I expect it to run to 300k. The wife gets the nicer newer car that we also use on long trips. We bought her Sportwagen brand new in 2019 before the market went nuts and paid it off in 6 months. 
 

TLDR - Set rules before you shop to prevent bad financial decisions. 

How much car do you WANT to afford? You don't need to max out what the rule of thumb is for a car payment unless you want to. Keep in mind that you'll be paying full-coverage insurance for anything bought with a loan. Banks like to protect their assets  The sort of upside to that is a non-deductible glass addition to the insurance is pretty cheap. Sounds like that would pay for itself pretty with how often you get windshield cracks.

Loans do exist for used cars. Rates aren't quite as low as buying something new (I think the gates are like 0-1, 1-5, 5-10 years old) but that is balanced by the lower price.

Edit: I don't mean this as a sassy reply. It's honestly does boil down to how much money you're comfortable spending each month. That rule of thumb is just a guideline. I make six figures and have a $322/month payment. Technically I could pay a lot more, but I'd rather put that money elsewhere. 

And payment isn't the only factor, either. Like I said, we could pay a higher amount cash. 

In reply to pheller :

For sure. The important part is overall cost, not monthly payments. Otherwise we'd all have some insane 96 month loans, haha. 

We usually put something down to get a reasonable payment, and take out 5 year loan (with the goal of paying it off in 3). Sometimes we've paid them off sooner, sometimes it takes a little longer.  I like the flexibility of a lower payment in case other financial stuff happens. There have been many years we've had no car payments, and times where we've had two car payments. In an ideal world we try to stagger car purchases, but sometimes the world isn't ideal.
 

We go for value, and typically drive our cars into the ground. Off lease used vehicles have worked out well for us ('05 Odyssey, '16 Pilot), and I've also done higher mileage but newer vehicles ('17 Odyssey purchased in 2020 with 193k on it). I try to ensure my wife has the newest, safest, lowest mileage car and I tend to drive the higher mileage ones (minivan with 220k, Rav4 with 231k).

SUVs seem to be a better value than a comparable pickup truck. We've run cargo boxes on all of our daily drivers for vacations and I'm a big fan.

Sometimes the safety features in newer cars can work to your advantage from an insurance cost perspective, but it's always good to get a quote for the vehicles you're considering.

thatsnowinnebago said:

In reply to pheller :

For sure. The important part is overall cost, not monthly payments. Otherwise we'd all have some insane 96 month loans, haha. 

ehhh... I don't make my annual salary all in one lump sum. So I budget things based on how much I make a month (or in my case, every two weeks). EVERYTHING falls into that budget, just like businesses do. So monthly payment means something. I don't like taking out a large sum out of savings to buy a large purchase with cash, as in my experience, right after you do that, you have an emergency expenditure come up that now you can't take care of. I'd rather take out a loan on a car and make the term as long as possible to get the monthly payment down, then use extra money per month to make more than the minimum payment (often doubling it) to pay it off earlier, but have a buffer so that when something unexpected comes up, I can drop down to that lower minimum payment for a month or two.

That being said, that monthly payment is ALWAYS based on overall price and interest rates. So if you want to pay no more than, say, $250 a month for no more than 5 years, you know going in that your overall budget is $15k for a car with a $2k down payment. So that's the price range you shop in.

https://www.calculator.net/auto-loan-calculator.html

The more car you buy right now, the less real estate you'll be able to own later.

I find it really hard to argue with 7-10 year old 100k mile cars that you buy for 7-10k and sell after 10 years at 225k for $1500.

But maybe that's my curse.

When I lived in AZ I had full glass coverage on my cars as I would go through 2-3 windshields per year, I'd talk with your agent about seeing the cost of adding that to whatever vehicle you end up getting.

You said that your existing cars have no value, but if they are running and driving, they are of value to someone out there. You could look at selling a couple, which would also reduce your insurance/tag fees annually.

Get a base rate on a used car loan from a local credit union, there are a few in AZ (I used to have one), you could buy private party that way, or take to the local dealership and see if they will beat the rate when you start negotiating.

If you do have substantial savings, make sure you have that money working for you, even a high interest savings account is worth it (I use Ally, but there are others out there). Instead of it sitting in a standard savings I'm getting about 4.5% these days (it does adjust based on the fed rate), but much better than my day to day checking/savings bank. 

I realize this got bumped, so I don't know if you've made a decision already. 

I would ask, if you're concerned about the payment, would putting a couple thousand into the existing truck be worth it for the next few years vs a payment?

Here's why I don't like driving the truck on big road trips where offroad camping isn't required: 

- It's got a 20 gallon tank that it empties in less than 300 miles. At $4/gal, if I drive 300 miles in the truck I'm spending most of a hotel room on the excess fuel consumption over a modern 30mpg vehicle. 

- It's got big tires that have never been smooth rolling, despite multiple attempts at balancing. 

- It's got a non-functioning airbag system that I could FIX and have planned to, but it's a 20 year old truck with all the safety or lack thereof, and that makes me a bit nervous at 75mph on dark desert highways. 

- 230k miles. It always starts. Runs great. Doesn't mean it's not a few miles from catastrophic failure. 

Other vehicles currently: 

2010 Prius 240k need windshield, struts, gutted cat (to prevent excessive oil consumption from plugging it up.) 

2012 Honda Fit 145k, needs nothing. Too small for the family. Wife loves the car. 

Update on potential options:

I've always wanted a Mercedes E-Series wagon. My wife is agreeable to this idea. Enough power and space for us for a few years. Unique. Fits in the garage. And most importantly - plenty of options. They are nearly everywhere, with any combination of age and mileage, and as a result, affordable. 

I think the better way to approach it is % of networth. 5-10% of your networth on a loan is not going to kill you. Even if the car loses 25% of the value due to something happening to it or the market in the first month that works out to about 1-2% of your net and that is about what you fluctuate in the market anyway on a given day. 

I'd budget as much for repairs to the E-class as I would for your payments. No way I'd own one of those unless I was flush with cash.

ddavidv said:

I'd budget as much for repairs to the E-class as I would for your payments. No way I'd own one of those unless I was flush with cash.

The E is generally very reliable. Sure an oil change will be more expensive than it would be on a Corolla, but you don't need to worry about spending $1k a month to keep one on the road. 

Consider tapping a home equity line of credit (HELOC) to borrow money at a rate that will probably be better than what you can get for a used car loan.

Rivercanoe ^

In reply to Robbie (Forum Supporter) :

Nuked

So what did you buy?

I love how canoes often bring about the "so what eventually happened?" question

I got a 2017 Honda Pilot Touring with just under 100k. White, black leather, all the bells and whistles. Just hammered out a 800 mile roadtrip loaded to the gills nicely, and we'll do a 1000 mile road trip with it at the end of the month. 

We paid $23k cash out the door. It was too much, but it was also a Honda dealer and the vehicle had been a former CPO car and gotten all of it's service at that dealer. 

I still want an E-Series Wagon, but we almost immediately put the third row seat to use in the Pilot, and I couldn't imagine not having all this space when we do our roadtrips. It fills up quick with young kids.