The car payment question nobody's asking
10% of Americans pay $1,000 a month for their vehicle. The dollar amount isn't the real problem.
Hi there, my friend.
I’m taking the day off from work today, but not to do anything fun, unfortunately.
Nope, I’m going to spend the day taking an online defensive driving course.
Don’t act like you’re not jealous.
Yeah, I was driving home after moving my son out of his college dorm room and got pulled over for going a little faster than I should have. Nothing crazy or outrageous, but just fast enough to catch the police’s attention on an open stretch of Texas highway.
Now I get to spend six hours online taking a course to learn how to be a safer driver. I’m definitely not looking forward to it, but it beats the heck out of having my car insurance increase. My family’s premiums are already steep enough, given that we have a college-aged driver. The last thing we need is something else to push them higher.
Cars are a hot topic these days
I’ve been talking a lot about cars lately, and not just because of defensive driving. LendingTree recently released a report revealing that 10% of Americans with an auto loan have a $1,000 monthly payment on one of those loans.
One thousand dollars a month for a car payment!!
Per LendingTree, that $1,000 equals 14% of Americans’ median monthly household incomes. And that’s just for the loan payment. That doesn’t include insurance, gas (which has been a little pricey lately, as you might have noticed), regular maintenance or any other costs associated with owning a car.
In my home state of Texas, where people love their big ol’ trucks, cars and SUVs, 15% of all auto loans have monthly payments of $1,000 or more.
I get that everyone has their thing that they love to spend money on and that vehicles are that thing for many, many Americans. I also hate to yuck other people’s yum, but, man, locking yourself into a $1,000 monthly payment on a vehicle for years just feels like a recipe for disaster.
My wife and I tend to pay cash for our vehicles. We’re able to do that, in large part, because we’ve never owned a car for less than a decade since we graduated from college, we tend to buy less car than we can afford and we consistently put savings into a car fund so when we do end up needing (or just wanting) a new car, we have substantial savings built up to pay for it.
Of course, with most financial questions, there’s no one-size-fits-all perfect answer, and this is certainly one of those cases. For some people, that giant monthly payment is perfectly manageable. If you have a high income, save consistently for retirement, have a substantial emergency fund, are not carrying high-interest debt, and are genuinely passionate about cars, that payment may fit just fine into your financial life. Also, if you’re a realtor or a salesperson or work in some other role where a really nice car can enhance your brand or your business prospects, it can make sense, too.
The problem is when that payment starts crowding out the things that matter more.
The question to ask yourself about your monthly car payment
If writing that check every month means you’re putting off retirement savings, carrying a credit card balance, skipping your emergency fund, or constantly feeling like you’re one unexpected expense away from trouble, the issue isn’t really the car payment. It’s the tradeoffs the payment is forcing you to make.
That’s why I think focusing on the dollar amount alone misses the point. A $1,000 payment can be perfectly reasonable for one household and a financial disaster for another. The more useful question isn’t, “How much is the payment?” It is instead “What will I have to give up to make it?”
If the answer is “not much,” you’re probably fine. If the answer is “my financial flexibility, my savings goals, and my peace of mind,” it’s a sign that the vehicle just isn’t right for you, no matter how sexy it may look in the driveway.
In case you missed them…
I’m not a car guy, but they’re one of the biggest purchases we ever make, so we talk about them from time to time here at Ask, Save, Earn.
Here’s a post with some wisdom from the savviest car expert I know…
And here are a couple about managing high gas prices…
I wish I could be confident that the affordability crisis around cars and gas would end soon, but the truth is there’s very little reason to believe it will, at least in the short term. That’s why it is important not only to be a smart, informed shopper when you’re looking for a vehicle to buy but also a diligent owner once you’ve taken the vehicle home. Taking good care of the car, including keeping up with your regular recommended maintenance, can make it last longer and allow you to keep it well after it is already paid for.
That should really be the goal. After all, the longer you can go without having to make a car payment, the better.
By the way, it is the same thing with defensive driving. The longer you can avoid having to take it, the better. Trust me on this one.
Until next time!
Matt