Everyone overspends from time to time, but when it comes to big purchases, like a home or vehicle, something that seems like an exciting splurge could end up devastating your finances.
The question of, “How much is too much?” is quite personal. To say that you should only spend a certain percentage of your income on a car doesn’t take into account where vehicle ownership sits on your list of priorities, how often you drive or what the purpose of the vehicle will be. Knowing it’s a personal choice, Elizabeth Grahsl, a certified financial planner in Dallas, tells her clients to use 15% of their income as a guideline for how much to put toward auto expenses. Generally, you’re spending too much on a car if the total cost of ownership prevents you from reaching other financial goals.
“I see a lot of clients [whose] car payment is close to what they pay on housing,” Grahsl said. She clarified that “car payment” included all expenses related to a vehicle, like insurance, maintenance, parking and so on. “Then they can’t afford to save or travel or do fun stuff.”
Accurately determining how much you should spend on a car requires a lot of research, both of your own finances and of the auto market.
“I think an hour’s worth of work could save you thousands of dollars over the five years you own the car,” said Hank Mulvihill, a certified financial planner in Richardson, Texas. Consider a vehicle’s fuel economy and how fluctuations in fuel prices could impact your budget (for example, if you have a long daily commute, a 20% increase in gas prices could really hurt). Call your insurance agent to find what your premium will be for a specific vehicle. Spend time consulting car reviews and get an idea of what maintenance could cost you.
“Anybody should do some basic research,” Mulvihill said. “Total cost of ownership may not be something you budget for unless you think about it.”
Even if you’ve done your due diligence and go to a dealership knowing exactly what you want, you may still overpay for a car if you’re not prepared to stand your ground against a salesman or ignore features you want but don’t need.
“The unfortunate thing about cars is they’re not just a financial purchase, they’re an emotional purchase,” said Rick Kagawa, a certified financial planner in Huntington Beach, Calif. He’s a self-described car nerd and will buy cars for his clients to remove their emotions from the equation: They go over everything the clients want in vehicles, decide on exactly what the clients are going to get, and he goes to complete the purchase. That prevents his clients from gravitating toward a common, costly loan — one with a long term.
“The price for the car is so big people cannot relate to a $40,000 or $50,000 purchase, but what they do relate to is a monthly payment,” Kagawa said. Prioritizing a certain monthly payment may leave you with a loan spread out over six or seven years, which may be longer than the consumer plans on owning the car in the first place.
“The finance person says, ‘I can get you to whatever the number is,’ but you’ll be on a six-year note, and people don’t care,” Mulvihill said. Extended warranties, maintenance plans and other add-ons may be included in a monthly payment quote, which you may or may not need, so it’s crucial to pay attention to the details. “If you don’t understand all that, you’re going to end up with way more obligations than you should.”
Taking on an auto loan, whether the vehicle is used or new, can be a huge financial burden and shouldn’t be done without careful research. Do your best to get your credit in good shape before applying for a car loan (you can get two of your credit scores for free on Credit.com to see where you stand), and shop around for the best deal before you commit.
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This article originally appeared on Credit.com.