Cars Are Too Expensive Right Now: What to Do if You Need a New Car
Have you found it difficult to afford a new car (or any car) and manage your car payments?
Along with everything else, the cost of a new car has increased dramatically over the past few years, and more people than ever are struggling to afford a car. Newsweek reported recently that new car prices are 30% higher than in 2020 and used car prices are 38% higher.
Personal finance experts recommend that you keep your car payment to under 10% of your monthly income, but with higher prices, that may not be possible. Given the average cost of a new car these days, you may need to earn at least $100,000 to stay within that metric.
That means that 80% of Americans “can’t afford” a new car.
Yet having a reliable vehicle is critical to the basic survival of the majority of Americans who don't have access to reliable public transportation. I’m a huge fan of public transportation and love visiting European cities where I can easily get around without a car. But the reality is that most American cities are just not at that point.
Even in an area like Minneapolis/St. Paul (where I live), where we have quite a few trains and buses, it isn’t easy to get to where you need to go in a timely manner. And it’s completely impossible in rural areas.
As a result, cars are a necessity for most people.
So what are people to do? There’s not much that can be done about the cost of cars, but you can at least employ some smart car shopping strategies and make sure you’re as prepared as possible.
Smart Strategies for Buying a Car You Can Afford
1. Be prepared before you go to the dealership
Car dealers LOVE it when you show up without being clear on what you can afford to pay. They know that once you get in the car and imagine yourself owning it, they’ve got you. This is due to a cognitive bias called the Endowment Effect.
The Endowment Effect says that people place a higher value on things that they already own. For example, if you’ve ever perused Facebook Marketplace or Craigslist, you may have noticed that people tend to (attempt to) sell items for a higher price than people are willing to pay.
This is because once you own an item, you are more invested in it and assign a higher value to it.
When you test drive a car, you start to be able to see yourself owning it. Even though you don’t own the car yet, your brain has made a shift that makes walking away that much harder. It even makes you willing to pay more than you might otherwise have done. And car dealerships know it.
That’s one of the reasons why it is so important that you go in knowing exactly what you are willing and able to pay ahead of time.
2. Calculate your budget
Before you go shopping or start getting attached to certain cars, you need to know what you can afford.
One general rule of thumb says that you should spend no more than 10% of your monthly take-home pay on a car payment, and no more than 15-20% on transportation costs overall (including gas, car registration, maintenance, and insurance).
What’s more important than this guideline, however, is figuring out how much available money you have that could be devoted to a car payment. Take a look at your monthly expenses. How much do you have left after you’ve paid for all of the other things you need?
If you don’t have enough, then you’ll need to make some choices about which things to prioritize.
When you calculate the monthly amount available for a car payment, remember that you’ll also need some money for car tabs, insurance, gas, and maintenance.
3. Don’t base your decision on car payment alone
Car dealers and salespeople are experts at selling you more than you can afford by manipulating monthly payments. You might end up paying thousands more than you anticipated because they extended the car loan term to lower your payment.
Don’t get sucked in by this!
When you’re shopping for cars, do not tell the salesperson how much you want your monthly payment to be. Negotiate based on the overall price instead.
4. Do your research
Car salespeople are masters of getting you to spend more than you’d hoped. They manipulate numbers, hide the true costs, and use masterful sales psychology techniques.
If you have any hope of sticking to your budget, you have to be prepared.
Research cars ahead of time that might be in your budget.
Use a car affordability calculator to figure out how much you can afford.
Compare prices from dealer to dealer.
Educate yourself on the various fees and taxes you might pay, as well as how much the vehicle will cost to insure. Generally, you can assume that your “out the door” cost will be 10-15% higher.
Edmunds and Kelley Blue Book are excellent sources of all kinds of information to help you prepare before you enter a dealership.
In addition to research on cars, it’s helpful to educate yourself about car loans and how much you might pay.
Find out what your credit score is and use a tool like this auto loan calculator to see what interest rates you might qualify for and how different loan terms affect the total you pay for the car.
Remember, the longer the term of the loan, the more you’ll pay overall.
5. Consider used cars
If you watch or listen to Dave Ramsey, you’ll have heard him berating people for buying new cars or even for buying a used car using a car loan. In his mind, I guess most people would drive beaters.
He’s right that saving up for your car purchase so you can pay in full and buying used cars are smart strategies.
Buying a good-condition used car is sometimes significantly more affordable and should always be considered as an option.
At the same time, buying a beater might not be the best idea. Not only will it likely come with increased repair and maintenance costs, but it also might not be the best for your life. For example, if you live in a rural area, you don’t want to risk breaking down in the middle of nowhere at night during the winter. Plus many people rely on cars to get to work and don’t get paid if they don’t show up.
6. Evaluate your requirements
When you’re looking at new cars, it’s easy to think that you need all of the features. But if you’re honest with yourself, that may not be the case—at least not with everything.
(I needed a car that could fit three kids in car seats. I didn’t need a vehicle designed for off-roading.)
When you sit down to look at cars, start with a list of what is most important. Identify those features before you start looking at actual cars. Keep this list handy so you don’t get carried away when you show up at the dealership.
Ultimately, it may not be possible to keep your car payment to less than 10% of your monthly take-home pay. Sometimes life is just plain expensive. But if you’ve done your best to control the costs and find that you don’t have any other options, you might just have to be okay with cutting back in other areas so that you can spend more on your car.
