Many consumers ask, "How much car can I afford?" Here are a few rules of thumb.
BORROW FOR FOUR YEARS OR LESS: Nearly one-third of loans are for 72 months or longer, according to a recent J.D. Power and Associates report. While some consumers are buying larger and more expensive vehicles because they need them, others have a case of the "wants."
Money guru Clark Howard has said, "If your payment is too much at 42 months, that means you're buying too much car."
KEEP PAYMENTS TO 20 PERCENT OF TAKE-HOME PAY: As a rule of thumb, keep the total of all vehicle payments to less than 20 percent of take-home pay, not gross pay.
20/4/10 RULE.This combines several rules, referring to a 20 percent down payment, a loan term of four years or less and payments plus auto insurance not to exceed 10 percent of gross income.
DON'T BUY A NEW CAR. A new car can depreciate 30 percent in the first year. That means losing $9,000 in value on a $30,000 car during the first year. "I'm a big fan of certified used vehicles,'' said Farnoosh Torabi, a personal finance expert.
DON'T LEASE.Generally, financial experts frown on serial leasing for most people because they are continually paying for only the most expensive part of a car's life, the first few years.
PAY CASH. Paying cash for a new vehicle seems absurd in households that don't have an extra 30 grand stashed away. But it's not as crazy as it sounds. First, remember that some people buy used - not new - cars. So maybe the purchase price is closer to $15,000. And most people have some value left in their existing vehicle, which they can sell or trade in. If that's worth $5,000, the balance they need to come up with is $10,000.
DRIVE UNTIL THE WHEELS FALL OFF: Not to be taken literally, this hints at the wisdom of keeping a vehicle a long time, say, more than 10 years. Indeed, even the depreciation hit you absorb in buying a new car softens if you keep a vehicle a long time. Remember that car repairs are typically cheaper than car payments.