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How much should Marlon spend for a vehicle?
DFA reader Marlon asked:
“On super bowl Sunday of last year my sister in law totaled my car. 15 days later we bought a 99 Mercury Cougar. We went to a buy here pay here car lot. As of March 1st we will have made one year of payments. Just this past December I got my bankruptcy discharged. I would like to get out of the 99 Cougar and into something safer.
How long and how much should I come up with for a used vehicle?”
The 1/10th Rule for purchasing a vehicle
I first saw this concept used by the Financial Samurai, and I like it. The 1/10th Rule states that the car you buy should cost no more than 1/10th your gross annual salary. Example: If you earn a $50,000 yearly salary [50,000/10 = 5,000] you should spend no more than $5,000 toward your next vehicle.
Marlon, divide your annual salary by 10. That is the limit on how much you should spend toward a vehicle.
Financing after bankruptcy
You also mention the fact that you just had your bankruptcy discharged in December, 2009 and are wondering how long you should wait. I am assuming you mean how long you have to wait before you can be considered for additional financing for yet another vehicle. I have a couple of things to say about that.
- Can you finance? Financing purchases may be what caused your bankruptcy in the first place. You said you were making payments on the 99 Cougar and that March 1st will mark 1 year worth of payments, but you also stated your debts were discharged in December. Did that discharge not include the auto loan for Cougar? Do you still owe on the Cougar? If so then the last thing you should be thinking about is financing another vehicle. If the Cougar is unsafe AND unpaid then you need to focus on getting that debt settled ASAP… THEN you can begin saving money toward another used vehicle.
- How long until you can finance? Although a bankruptcy can remain on your record for up to 10 years, its effect on your credit can begin to lessen the day after the case closes. As long as you handle your finances responsibly from here forward, your credit will improve sooner than you might expect. How soon you will be available for financing depends on how responsibly you handle your credit from here on out.
- Rebuild your credit. Your credit has taken a hit and needs to be nursed back to life. If your debt to income ratio (the measure of your monthly debt payments to your monthly gross income) is raised too high too fast your credit will never improve and you’ll find yourself back in financial trouble but without another bankruptcy net to fall into. If you must borrow, do so a little at a time.
Here’s what I would do Marlon:
I would not finance another vehicle. You mention the Cougar is not safe. If the Cougar is not beyond repair then do whatever necessary to get it operating safely. Will new brakes make it safe? Then get new brakes.
If it is beyond repair then do the following:
- Find alternate transportation (friends, bicycle, bus, etc.)
- Cut out all unnecessary spending.
- Save extra money toward your next used vehicle.
Do this as long as your situation will allow, or until you have enough money saved to buy a vehicle in sound operating condition. You can find such vehicles for as little as $1,000 if you know how to look. Also, remember not to spend any more than 1/10th your yearly salary on the vehicle. So if 1/10th your salary is $5,000 – then shoot for somewhere between $1,000 and $5,000 for the vehicle.
What do you think?
What would you do if you were in Marlon’s shoes?
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