http://www.forbes.com/sites/jimhenry/2012/02/29/the-surprising-ways-car-dealers-make-the-most-money-off-of-you/#478649e43ac8

Buying a car shouldn’t have to be super complicated but for some reason it seems to be. I remember years ago when I bought my first car – it was a little Hyundai Accent which today I would never dream of buying. I thought I’d done my homework though – I went online and found average pricing for the car and came prepared to haggle.

Of course, I didn’t think about other details. Stupid I know, but I was young once too.

Financing or Paying Outright

I’m not a real big fan of financing a car. I get that some people have to because they just haven’t read a single dam* thing we write here and they have zero savings. However, cars always depreciate in value, meaning that you are basically doing the same thing as buying with a credit card – paying dearly for the privilege of getting more now than later.

If you do finance instead of buying, make sure that you at least negotiate a decent deal on the interest rates. Many dealerships will happily take a loss on the cost of the car knowing they’ll make up for it by charging a sucker a high interest rate and earning a cut from the bank.

Check online for this question and you’ll find lots of calculators. The thing is, as I said, I believe that something which depreciates in value is best purchased outright if you can afford to do so. After all, it’s not like buying a home where, if you stay long enough and don’t act like a lemming, buying when the market is frothy, you can expect to see the value increase.

Resale Value

Beyond the question of financing vs. buying is a question I admit my young self screwed up badly on – resale value. Look, cars lose value. It’s a fact of life that no matter what you buy, it’s never going to be worth what it was when the dealer handed you the keys and you drove off the lot. That said, there’s losing value and there’s losing value.

My little Hyundai Accent met an untimely death when I went over a wet patch on the Belt Parkway in Brooklyn. The car started flying back and forth through a little tunnel like a pinball. Miraculously, I walked away but the car was totaled. In a lot of ways, that was a blessing in disguise because the insurance company paid almost what I still owed on the dam* thing.

Had I simply kept the car and not played human pinball, the thing would have been basically worthless by the time I had paid down the loan. So you need to make sure that whatever car you buy is one that is going to hold at least some resale value so you’re not losing your shirt when you inevitably sell it.

But How Much Car Can I Afford?

Okay, okay. I promised to tell you how to know how much car you can afford. Not how to buy a car. I’m going to give you a simple rule to follow: If buying outright, you don’t want to spend more than 20% of your savings (and ideally, no more than 10%). That lets you keep the majority for more important things like emergencies and other things while still (hopefully – if you are saving properly) affording a nice car.

If you plan to finance, most financial experts recommend not carrying debt payments of more than 36% of your total monthly income so you need to account for additional debts you owe and then figure how much you can afford to pay back each month on the car.

Another interesting idea I came across was applying my 20% rule to your income – meaning you can spend no more than 20% of your annualized income to buy a car. Either way, it’s a good idea to consider used rather than new because quite frankly, the moment you drive off the lot, you just threw thousands of dollars in the garbage.

Now go out and do that American thing – hit the open road!

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