The road to financial ruin is paved with expensive cars. Over the years, buying a car has become more than a purchase of convenient transportation. It’s a status symbol supposedly showcasing your worth. In reality though, spending too much money on cars you can’t really afford hinders your finances. Every dollar you overspend on cars is money that could have been invested to build real wealth. Let’s take a look at three signs you spend too much money to get from point A to point B.
1. Hauling around payments
“You could be driving a new shiny car for only 72 easy monthly payments!” That may sound like a far-fetched infomercial pitched by a sleazy car salesman, but it’s more common than you think. Recent research from Experian reveals more consumers than ever are financing vehicles with terms between 61 and 72 months. Approximately 44% of new-car buyers and 41% of used-card buyers take out 61- to 72-month loans. Making matters worse, 29% of buyers are using 73- to 84-month loans to buy new cars, while 16.4% are using those extended terms to buy used cars.
If you need a loan lasting 5, 6, or 7 years in order to pay for a car, you’re spending too much money on your ride. Low interest rates aren’t a valid excuse in many cases. The average interest rate for new and used vehicles is about 4.6% and 8.8%, respectively.
How much car can you afford? One general guideline is the 20/4/10 rule, meaning you should put down at least 20%, finance it for no longer than four years, and not let the total monthly expense (including principal, interest, and insurance) exceed 10% of your gross income. If you skip payments altogether and pay cash for used cars costing $15,000 or less that you keep for at least 10 years at a time, your finances will be in even better shape.