If your car has started breaking down or racking up repair bills, it might be time to get a replacement. But how much car can you afford?
Financial expert Dave Ramsey he has a simple answer: buy only what you can pay for in cash. This principle could save you thousands and help you avoid the trap of long-term debt.
Financing might seem easy, but it can cost a lot more in the long run. At the end of 2024, the average interest rate for a new car loan was 6.6%, while used car loans averaged 10.8%, according to Edmunds.com.
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That means financing a $30,000 car for five years at 6.6% interest would add over $5,300 in additional costs. Ramsey's advice is simple: avoid the debt and stick to what you can pay up front.
To set your budget, start by looking at your savings.
How much can you spend without affecting your other financial priorities? If you have debt to pay off or you're saving for a house, those goals should come first. If you're trading in your current car, tools like Kelley Blue Book can help estimate its value and add that to your budget.
Ramsey also recommends a key rule: the total value of all your vehicles should not exceed half of your annual income. For example, if you earn $70,000 a year, the combined value of your cars should stay under $35,000. This guide helps prevent tying up too much of your wealth in assets that lose value over time.
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Depreciation is a big reason to think twice about buying a new car. According to a report by LeaseLoco in 2024, new cars can lose up to 20% of their value in the first year and almost 50% within three years.
Ramsey suggests avoiding new cars unless you have a net worth of at least a million dollars. Choosing a reliable used car can save you thousands while still providing a reliable ride.
It is also important to consider the cost of owning a car beyond the sticker price. In 2024, AAA estimated that the average annual cost of owning a vehicle – including fuel, maintenance and insurance – was $12,297.
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According to CarEdge, luxury vehicles often have higher maintenance and repair costs than standard cars. For example, the 10-year maintenance cost for a BMW 7 Series is around $14,768, while a standard Toyota Camry equates to around $4,203 over the same period.