If your car has started to break down or is piling up repair bills, it may be time to replace it. But how many cars can you afford?
Financial expert Dave Ramsey has a clear answer: buy only what you can pay for in cash. This principle could save you thousands and help you avoid the long-term debt trap.
Financing may seem easy, but it can cost significantly 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 over five years at 6.6% interest would add more than $5,300 in additional costs. Ramsey’s advice is simple: Avoid debt and stick to what you can pay in advance.
To determine 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 are 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 rule of thumb: 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 total value of your cars should stay under $35,000. This guideline 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 carefully about buying a new car. According to a 2024 report by LeaseLoco, 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 $1 million. Choosing a reliable used car can save you thousands while still giving you a reliable ride.
It’s also important to consider the costs of owning a car beyond the sticker price. In 2024, AAA estimated the average annual cost of owning a vehicle – including fuel, maintenance and insurance – to be $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 approximately $14,768, while a standard Toyota Camry averages about $4,203 over the same period.
