Originally Posted by
Zofia
Borrowing for a new or used car – Sometimes, especially when you are starting out, it is necessary to borrow money to buy a car. Cars are necessary for getting to and from work, buying groceries and the necessities of life. (Sorry Dave Ramsey, cars are both expensive and necessities.) Given that I don't subscribe to Dave Ramsey's world view, what are some guardrails to put around a car purchase?
I would submit that borrowing money to buy a car is acceptable under some circumstances. First, have enough saved to pay twenty percent (20%) of the purchase price as a down payment, or have a trade in equal to or more than twenty percent (20%) down. Second, the loan needs to be very short term, certainlynot more than three years. Third, and finally, the monthly loan payment cannot exceed eight percent (8%) of the borrowers monthly gross income.
If we apply those guardrails, a loan isaffordable and reasonable for our situation.
For example, we have a person making $40,000 per year. That means the maximum loan payment $266.67 permonth. Thus, the car loan can be no more than $9,000. (Interest rate of 4%, if higher interest, then a smaller loan amount, though not by much.) Assuming that $9,000 is 80% of the value of the car, the sale price could be as high as $11,250. Thus, the needed down payment would be $2,250. Can you get an acceptable car for $11,250? Yes. Will it be new? No. Will it be super nice? No. Will it get you to and from work safely? Yes.
As you make more money, the same guardrails apply except as to luxury cars. Then, the guardrails are stricter, paid in full, or within a year.
HTH
Z