The Wealth Creation is always the numbers! In this article are a bunch of stats on why buying the wrong car and not understanding the nature of cars is a WEALTH killer! Now anyone that knows me, Knows I have ALWAYS been a cash buyer of cars! I have driven the same car for 14 years and LOVE it! As a matter of fact, I would love to buy the same car I have with less than 50k miles on it, if I could!
When buying a Car, Lenders will use a rule of thumb that 20% of your take-home pay is what you should spend on a car. This is how they figure out how much car you can afford! Bad idea if you ever want to buy a home, invest, or even think about getting ahead financially! Think about it! 20% net income on your car!
So what do mortgage people tell us? Let's look at what the people that will help you buy a home say. NO more than 36% of your gross income should be spent on debt services such as housing (rent or mortgage payments) and car loans added together. Now, the mortgage guy tells you 36% GROSS (Before Tax), and the car guy is telling you 20% NET (After Taxes)!
#1 problem! Gross and Net numbers! 20% of net is different for most people, but on average we pay 14% of our Gross Pay on TAXES! Now my Doctor friends and Successful Business Friends DO NOT throw anything at your computer screen! I know this is crazy low! 14% is crazy low, but it is going to make my point. 75% of you reading this probably do pay a much higher tax rate but this is for illustration purposes! SO 14% of your GROSS PAY is going to pay your taxes... this would make 20% NET PAY for the car payment equal to 23% of your GROSS! Ok, do you see the problem?
If the Mortgage guy is telling us only 36% of GROSS on TOTAL Household Debt Service (home and car payments) and we blow 23% on a CAR?? Your HOUSE payment is just left with 13%, so you wind-up spending 1.77 times more on a dumb car than your home! CRAZY!
Let’s put some numbers to this. $100,000 Gross Income x 36% (Gross Total Household Debt Service of 36%) = $36,000 (This is the amount available to spend on Household debt service). According to mortgage lending guidelines, your HOUSEHOLD Debt should not cost you more than $36,000 per year for ALL monthly house payments (rent or mortgage payments) and car loans added together, we are not even adding in credit card debt, that's for another blog. So now we take $100,000 Gross Income x 23% (This what Car Lender will tell you, you can afford) = $23,000. So $36,000 Total Debt Service - $23,000 leaves you with $13,000 per year to buy a house with! CRAZY!
So here are a few numbers for you to ponder! The average car COST is $40,000 and on average it will depreciate 11% the minute you drive it off the lot, 25% after YEAR 1, 46% after YEAR 3 and after year 5................63%! So my point here is BUY A USED CAR. That is if you want to save a TON of MONEY$$$!
Now let’s look at Leasing a car! Take a look at one off the list below....#3....lucky….#3! Land Rover! You can lease one of these babies for $1,000 per month for 39 months, and a small $8,000 downpayment, not a bad deal, after all, it is a $100,000 car! Look at your numbers above... you could buy 2 of these babies with the amount the Car Lender tell you, you could spend and still qualify! But wait! In 39 months you have to give the car back, and then you do not have anything! Well, you can lease another new one!
LOOK AT THE NUMBERS!!! $1,000 payment x 39 monthly payments = $39,000 + $8,000 upfront money (down payment). For a total of $47,000 on a car, you just handed back after the 39-month lease is up! Oh, I did not tell you that you can only drive the Land Rover for 7,500 miles a year, that's 625 miles a month. Hope you don't drive much, the average person drives 13,500 miles a year! If you exceed 7500 miles a year you are penalized HUGE $$$ for "excess mileage"! But let's just take the $47k to your backyard and light it on fire! You have nothing at the end of the lease!
SO what to do! Lease another one! Now I know these are SEXY new cars and people will look at you and say dang nice car! (well not if they are reading this) HECK NO!! RUN AWAY!! They will try to hook you again with a lease! BUY A USED CAR and drive the heck out of it! I just looked up a Lexus RX350! The 1st one I found on Cargurus.com was 2008 Loaded for $13,500, 52,000 miles on it! Ok, don't like that color 2nd 2009 38,000 miles $16,000! Ok still not your color 3rd one 2010 $14,600 with 52,000 miles! These are all almost NEW and cost the original buyer $50,000 + or -. I will let someone else take the hit on depreciation to the tune of $30,000 to $35,000!!!! I am not too worried about the color or keeping up with the Jones; whoever in the heck they are! SAVE MONEY BUY A USED CAR CASH AND BUY A DANG HOUSE!!! #myhomesavannah #teamyannett #savannahrealestate
32% OF AMERICANS LEASE THEIR CAR
1. FIAT (78% Leased)
2. BMW (70% Leased)
3. Land Rover (68% Leased)
4. Mercedes-Benz (67% Leased)
5. Audi (64% Leased)
CAR AMERICANS PURCHASE
5. Chevrolet (63% Purchased)
4. Honda (65% Purchased)
3. Toyota (68% Purchased)
2. Hyundai (73% Purchased)
1. Subaru (75% Purchased)
"A record 7 million Americans are 90 days or more behind on their car loans. While more than 5.8 million were delinquent during the Great Recession, as a percentage of auto loans outstanding, today's rate is 4.5% vs 5.3% at the 2010 peak. While this is a growing problem, auto loans total $1 trillion, much smaller than the $9 trillion home mortgage market where delinquencies are at an 18-year low.
Elliot F. Eisenberg, Ph.D.