266

I never really thought about money until one day I checked how much I made compared to the rest of America. The calculator said my household income is in the top 20%. Kind of funny to me, because I always considered myself middle class. (My tax bill reminded me that I'm not...lol.)

I drive my 5 year-old Honda around, and I see all these luxury cars.

Who the heck buys these luxury cars? I have a small mortgage ($1400/month) and no debt whatsoever (no credit card, no student loans, nothing, nada, zip). I ask myself who is willing to get into a $600/month payment or even put down $20k and still pay $400/month.

I'm really confused -- who's getting these cars? Or, more precisely, what the heck are they thinking? Seriously...I'm supposedly wealthier than 3/4 of America, so how come it feels as if 3/4 of them drive nicer cars than I do?

I wonder...Is there something I'm not understanding here regarding car payments?

  • 13
    You are aware that once you go higher (22%, 25% of top income) it goes up STEEPLY. Steep enough that there are lawyers and doctors that have "collect super cars" as hobby. – TomTom Sep 10 '18 at 18:50
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    Im curious, do you have a family or any other expenses? Car money depends a lot on other expenses. Say, $80,000 annually goes a lot further if you have a $900 per month mortgage/rent and $300 per month other expenses. Than if you have $1400 mortgage and $2000 other expenses. – Vality Oct 16 '18 at 20:43
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    To me, "small mortgage" and "$1400/month" contradict each other. – glglgl Jan 16 at 12:10
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    @glglgl It's all relative to where you live. I live in an area where a 3 or 4 bedroom, 2-car garage home, with a front/back yard, very low crime and a good (8-10) school system will run you no less than $400k (realistically $450k). Some places costs more to live. I have friends with $4k a month mortgages and also have friends renting a 1-bedroom for $1,200 a month. – ConfusedDeer Jan 17 at 13:43
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    @glglgl To me "$1400/month" is a condo in a high crime area. It's very highly region dependent. – SamYonnou Apr 30 at 21:01

18 Answers 18

292
+500

There's an aspect to this question that I really love. In general, it's a question about consumer behavior that can be expanded to inquire about the purchasing profile of any luxury good. Who buys $500 pocketbooks, $1000 wristwatches, etc?

I can offer one observation regarding the car. Two close neighbors, both couples drive cars valued well above what my wife and I drive. Both families moved, and shared with us that they failed to save for their kid's college tuition. My response was to feel that this was a choice they made. As I commented to my daughter, "We can afford anything, we just can't afford everything." Our budget started with saving both for retirement and college. Very little eating out, and modest vacations, cars, and clothing. This story is getting more common for us as our peers have high school age children.

As others have mentioned, the millionaire next door does not drive a Ferrari or wear a Rolex. To some extent, if you were able to peek at the budgets of these car buyers, you'll find what members here would consider at best, an interesting set of priorities.

156

How can people afford luxury cars? The same way they can afford anything: by finding it cheaply, saving for it, or adjusting their priorities.

  1. Company cars - either paid for by the company, or as part of a bonus/compensation/salary sacrifice scheme. I have friends who drive luxury cars, but they pay £200/month - not much more than, for example, finance on a used Honda

  2. People who have paid off their mortgage. There are people who spend a decade pouring every cent they have into a mortgage. Once paid off, they have £500-1500 a month "spare"

  3. People who have different priorities to you. I'm not bothered about big houses and holidays, but I love cars: I'd rather spend an extra £100/month on my car and have a holiday every 2 years, not every year

  4. People who only run one car in the family: if you're running two cars at £200/month, then discover one of you can work from home, you could have one £400 car and still be saving money on running costs.

  5. People who don't have (or want) children. Children are expensive, if they aren't part of your plans then you can save a lot of money for luxuries.

142

A while back, I sold cars for a living. Over the course of 4 years ,I worked for 3 different dealerships. I sold new cars at two and used cars at the last one.

When selling new cars, I found that the majority of people buying the higher end cars honestly shouldn't have been—80% or more of them. They almost always came in owing more on their trades then they were worth, put down very little cash, and were close to being financially strapped. From a financial perspective, these deals were hard to close—not because the buyer was picky, but rather because their finances were a mess. Fully half, and probably more, we had to switch from the car they initially wanted down to a much cheaper version or try to convert to a lease because it was the only way the bank would loan the money. We called them "$30,000 millionaires" because they didn't make a whole lot but tried to look like they did. As a salesman you knew you were in serious trouble when they didn't even try to negotiate.

Around 2% of the deals I did were actual cash deals, meaning honest cash, not those who came in with a pre-approved loan from a bank. These were invariably for used cars about 3 to 4 years old, and they never had a trade in. The people doing this always looked comfortable but never dressed up, you wouldn't even look at them twice. The negotiations were hard because they knew exactly how much that car should go for and wouldn't even pay that. It was obvious they knew the value of money.

One last difference between the ones actually with money and the ones pretending: the ones with money would walk away from any deal without looking back unless it was a great one. The ones without, well, they didn't.

That said, I've been in the top 3% of wage earners for about 20 years and at no point have I considered myself in a position to "afford" a new "luxury" car. IMHO, there are far more important things you can do with that kind of money.

80

Keep in mind your household income is in the top 20%, which does not translate to wealth. Given a healthy income, and no debt, other then a small house payment, you probably have a decent amount of free cash flow. This could easily be used to buy a car on time… which a lot of people do. Congratulations on being different.

Having said that, living as you do, you will likely be wealthier than your income suggests. If you invested the amount you saved on car payments for an average car you can become a muli-millionaire. Doing that alone can put you in the top 10% of the wealthiest in this nation.

Keep in mind 76% of Americans live paycheck-to-paycheck, so there is a sizable portion of the population that make more than you do, yet one costly emergency can cause them to spiral into significant financial difficulty. News flash: Emergencies happen. If I am not being clear, you are living wisely!

I would recommend reading The Millionaire Next Door and The Millionaire Mind. You will understand that not following the whims of advertisers is good for your bottom line and that it is good to be different from the general population.

One of my favorite stories from the author is these yuppies hires the author to find them rich people to sell their products. The author gets the rich people by offering them cash, albeit a relatively small amount considering their wealth (about $200) and lunch. The yuppies complain that the guys don’t “look rich” as there are no fancy suits or Rolex watches. One of the rich guys likes the pitch so much in inquires on how he can buy the company.

There are a lot of lessons in that short anecdote.

49

In addition to those who are wealthy (not the same as high income), there are also a certain number of people whose professional livelihood is enhanced by projecting wealth/income they may or may not have. For example, some consultants, lawyers, financial advisors or other salespeople. The same is true of luxury homes for industries where entertaining clients and associates is expected. These people are essentially making an educated bet that the additional sales they expect to make will outweigh the additional expense of the luxury items, similar to purchasing advertising.

But in many cases, people are either living beyond their current income, or living beyond their long-term income by failing to save for when they are too old/sick to work.

Additionally, many car brands that we traditionally associate with luxury have created mid-priced lines in the $30-40K range recently, so it is possible that some of the cars you are seeing are not as expensive as you might expect.

  • 1
    And with lots of people leasing rather than buying, you can get a ~3 year old Lexus in good condition for less than $20k, ~5 year for less than $15k. – Joe May 3 at 13:11
42

Partly I suspect this is selection bias. You say you see so many luxury cars go by. But if you're looking for them, you're going to notice them. Have you calculated the actual percentage? Do they make up 50% of the cars that pass a specific point in a specific period of time? Or just 10% if you really counted?

You say you live in Baltimore county, Maryland. That's a relatively wealthy area, so I'd expect the percentage of luxury cars to be higher than the national average. You'd likely see considerably fewer in the backwoods of Mississippi.

That said, some people who own luxury cars can't really afford them. I'm reminded of a wonderful TV commercial I saw recently where a man is showing off all his material goods, he talks about his big house, and his swimming pool, and his fancy car, with a big smile on his face, standing tall, and generally looking proud and happy. And then he says, "How do I do it?" And suddenly his expression changes to complete despair, he slumps down, and says, "I'm in debt up to my eyeballs." It turns out to be a commercial for a debt-counseling service.

Some people put very high value on owning a fancy car and are willing to sacrifice on other things. If having a big fancy car is more important to you then, say, having a nice house or the latest computer or a big screen TV or dining out more often or going on more expensive vacations or whatever you have to give up to get the car, well, that's your decision. Personally I don't care much about a fancy car, I just want something that gets me where I want to go. And I've always figured that with an expensive car, you have to constantly worry about getting in an accident and damaging or destroying it. If you put your money into a big fancy house, at least houses rarely collide with each other.

Personally, I make a nice income too. And I have a $500/month mortgage and zero car payment because I drive a 2003 pickup that I bought with cash. But I have two kids in college and I'm trying to get them through with no debt, that's where all my money is going.

35

It's all about what you value personally.

I'm mid-30s and drive a $40K "luxury" sports car. I also happen to wear a $6K wristwatch every day. I purchased both of these items because I thought they were beautiful when I saw them.

On the flip side, because I spent 6 years living below the poverty line, I instinctively spend almost nothing on a daily basis. My food budget is less than $50 a week, and I never go out to eat. I wear my clothes and shoes and coats until they have holes, and I drove my previous car (a Toyota) into the ground. My cell phone is 5 years old. The walls of my apartment are bare. I don't have cable TV, I don't subscribe to newspapers or magazines, and I don't own a pet. In all of these cases I don't feel like I'm "sacrificing" anything; food and clothes and cell phones and pets just don't matter to me.

If you truly feel that you're missing something in your life by not having a luxury car -- that owning one would be more satisfying than owning the corresponding tens of thousands of dollars -- then go for it. Just be sure to consider all the other things that money could buy before you do.

Lastly, buy in cash. Don't make monthly payments unless you enjoy giving money away to the bank!

29

I'll read between the lines: you're (justifiably) feeling smart about how you manage your money: debt-free, smart about your spending, saving for retirement, etc. But you're looking at all those fancy cars and feeling a little left out. And Americans especially have a love for automobiles -- it's not just transportation, a car is a status symbol.

Yes, some of those people afford their cars just fine. But a lot of people out there are AWFUL about saving and spend recklessly. Americans are notoriously bad at saving for retirement, for example.

So if they aren't saving, where does that money go? They buy stuff they don't need. They live paycheck-to-paycheck. They run up debt. They buy cars.

Overspending on cars is so easy to do: leases have low payments, or you can get a 6 year loan. There are many financial tricks for people that think only in terms of monthly payments.

So instead of lamenting that the grass is greener as all those BMWs whiz by, smile deeply and enjoy that feeling of sleeping well at night instead of stressing out about the next credit card bill and car payment waiting for you in the mailbox.

(And at the same time, if you really want a luxury car and want that to be a priority, you can make it happen and not go broke. Get a late model year certified pre-owned vehicle just out of lease, for example. Saves a ton of money, is still under warranty, and satisfies the lust for luxury.)

22

It very much depends on whether you want to drive around in an expensive car, or whether you want an expensive car parked on your driveway. And whether you want to buy a new car, or a used one. And whether you know a reliable garage that doesn't rip you off or not.

For example, if my wife who drives maybe 5,000 miles a year wanted a 5 series BMW, we could buy a five year old one with 120,000 miles, for about £120 per month purchase price if it lasts 6 years. 11 year old and 150,000 miles should be no problem for that kind of car. So that's quite affordable. For me, driving 25,000 miles a year, the numbers are quite different.

Fact is, if you drive around in my wider neighbourhood, you will sometimes see very expensive cars parked in front of very rundown houses. Some people find it more important to drive around in an expensive car than to live in a nice place. That's priorities. Many people can afford expensive cars if they rearrange their priorities (and I'm not saying it's a good thing).

PS. If you want to be seen in an expensive car (for example, you take your wife out), you can always rent a car for a day or two.

21

Most of the people I know that own them are slightly older, and thus in their prime earning years, and many have paid off their homes. That can free up $1000 a month or more in monthly expenses, which would easily cover a nice luxury car payment.

If you've got it, and are into cars, why not? What's the point in having the biggest tombstone in the graveyard?

13

Each of us makes our own way in life, making choices based upon or own needs and desires. Some of us choose to live simple lives, others choose more complex lives where we earn and spend more.

There are several points which one should examine and consider.

  • Perception bias. You notice luxury cars more than the rest, even though luxury cars make up a small percentage of cars purchased (about 8%).
  • Demographic Distribution. Some areas have higher incomes, others lower. You may live in a city where income is higher than average.
  • Maintenance. Luxury cars are often purchased by wealthy individuals or by those who lease cars, and these owners choose to maintain the car better than those who purchase less expensive models. Thus luxury cars 'survive' longer.
  • Quality. Luxury cars often last longer than the economy cars, or just that the owner chooses to repair the car when repairs are needed. Thus more luxury cars 'survive' longer.
  • Value. Luxury cars continue to hold a perceived value for more years than less expensive cars. The percentage of luxury cars to all cars thus increases with age.
  • Appearance. Some people choose to project an image of success by driving a luxury car (and other forms of conspicuous consumption). You may live in an area where image is important. Choices.
  • Priorities. Some people would rather drive a luxury car, and spend less money on other things (like savings). Choices.
  • Wealth vs. Income. Someone with lower income may have savings to buy a car (and other luxury goods).
  • Age. Older people often buy luxury cars, and they have more wealth or income, and often have fewer expenses.
  • Expenses. Roughly half of all homeowners own their homes (no mortgage), thus they have fewer expenses.
  • Debt. Many Americans are willing to finance cars for longer periods, and carry higher payments. Others prefer to have no car payment. Choices.
  • Market compression. The average car (Accord, Camry, Impala, Fusion, etc) costs 2/3 the price of an entry luxury car.

Consider that the market for new cars is not the entire population, but only the fraction of the population that can afford to spend $20,000+ for a new car (at $400+/month payments). You quickly realize that most people making below median income cannot afford to purchase a new car. They buy used cars, from the pool of cars left after depreciation has reduced the price of the car by half (or more).

One rule of thumb might be to spend < 10% of your income on transportation. Which might allow for a $400-500/month car payment for half of families. And when you keep a car for 10 years, that can mean two cars, one payment-free.

Consider that a new Honda Accord or Toyota Camry is $20-30,000 which is 2/3 to 3/4 the price of a new luxury car. When I purchased my (used) Civic several years ago, the price was nearly 1/2 the price of a new luxury car.

I recently purchased a (used) luxury car (7 year old, 70,000 miles) less than 1/3 the new price. The leather interior looks new, more amenities, better performance than my Civic, the car runs well, and with proper maintenance, I expect to drive it for 2-3 years and pass it along to one of my children.

12

I don't think you're missing anything on the math side as far as the payments. Likewise, it may seem everyone's driving a nicer car, but I'm going to predict that's based on area and a few other factors (for instance, my used car feels like riches in a college town). The behavior of why people would pay money, especially with high interest debt, for something is a little different.

To explain the behavior behind people who purchase luxury cars: for some people, a car is a purchase that they value, similar to a person valuing the clothes they wear, the house they live in, or the equipment they buy and either borrowing or paying full price on an expensive car is worth it to them. We can call it a status symbol dismissively and criticize the financial waste without realizing, "Wait, this is something they value" like a rare book collector likes rare books (would a rare book collector pass on borrowing money if it meant a once-in-a-lifetime rare book purchase opportunity?).

Have you ever felt, "Wow this is cool/awesome/amazing" with something? Basically, that's how many of them feel toward these cars. As much as I'd love to say they're only doing it for status (because I'm not a car person), that's actually somewhat de-humanizing and the more I've met people like this, the more I've realized this is their "thing" and to them it's totally worth it (even with all the debt). I have no doubt that there's a percentage of them who truly may be misled - maybe they don't realize the full cost of borrowing money or leasing. Still, for those who don't care the full cost, that's because it's their thing. We can all agree that it's still not wise to do financially (borrow on a luxury vehicle), and it won't change that some people will do it.

8

A used luxury car coming out of lease is usually very affordable. They are usually in good condition, still look relatively new, and are within the same price range as a newer Toyota or Honda.

4

Not a direct answer, but... a friend pointed out to me that z proper luxury limo, if loaded with four sales reps going to the same meeting, is cheaper than airfares would be and lets them hold a planning meeting en route.

Yeah, most of it is conspicuous consumption. But some of the road yachts have legitimate uses.

4

It comes down to individual priorities. Some people prefer to spend their money on a luxury car or SUV, rather than on computer gear, a bigger house, having three extra kids, eating in restaurants, or whatever.

Some people are quite happy to take out a loan to get more expensive products, and service that loan over several years.

There is also "status" attached to some makes (e.g. german marques). That comes with a status premium, which some people are prepared to pay for, or take out debt to get - and some are not. Compare (say) a base model Audi or BMW with a similarly priced non-luxury model from a Japanese competitor. The Japanese model will probably have more features (leather, large rims, safety aids, etc) than the European at the same price point - and it will be necessary to tick several options (and pay extra for them - which can amount to 30-40% extra cost) to get the luxury car with a comparable set of features. For some people, the luxury brand is worth the difference. For some it is not.

2

In many (most?) cases, luxury cars are leased rather than purchased, so the payments on even an expensive car might not be as high as you'd expect.

For simplicity, take a $100,000 car. If you were to buy that in cash or do a standard five-year auto loan, that would be incredibly expensive for all but the wealthiest of people.

But a lease is different. When you lease a car, you are financing the car's depreciation over the lease term. So, let's suppose that you're signing up for a three-year lease. The car manufacturer will make an estimate of what that car will be worth when you bring it back in three years (this is called the residual value). If this number is $80,000, that means the lessee is only financing the $20,000 difference between the car's price and its residual value after three years - rather than the full $100,000 MSRP. At the end of the lease, he or she just turns the car back in.

Luxury cars are actually especially amenable to leasing because they have excellent brand power - just because of the name on the hood, there are many people who would be happy to pay a lot for a three-year-old Mercedes or BMW. With a mid- or low-range car, the brand is not as powerful and used cars consequentially have a lower residual value (as a percentage of the MSRP) than luxury cars.

So, don't look at an $80,000 luxury car and assume that the owner has paid the entire $80,000.

  • 2
    A luxury car that sells new for $100,000 isn't worth $80,000 after three years. More like $40,000. And no, people don't pay a lot for a three year old Mercedes. – gnasher729 Sep 10 '18 at 19:46
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    @gnasher729 - A friend showed me a lease agreement for his car. The 3 year buyout was exactly 5/8 the purchase price. Implying the $100K new car is worth about $62K in 3 years. – JoeTaxpayer Sep 21 '18 at 21:38
1

Approximately 25% of all cars sold last year were leased, which is the highest on record. When you are leasing you don't own the car, instead you are basically renting it for a fixed term, and turning it back to the dealership.

It is very cost effective, because the manufacturers have a keen interest in making lots of cars. They are often subsidizing the lease by giving incentives to the dealer. They are gambling on the future value of their cars. They can lose on that gamble. The car business has turned into a financial nightmare for the car companies; they have huge development costs as the cars become more like mobile computing platforms loaded with sensors, and software that is constantly changing.

They can't hold a model for 20 years like Mercedes was able to do in the past. Now they have to constantly update their products. The only way to survive as a car maker is to pump out volume, and the leasing programs, which are quietly being underwritten by the manufacturers help them increase the production quantities, which helps lower the fixed development costs. If only the defense contractors could do this! they are stuck spending billions to build 20 planes, and so each one has a staggering price tag.

In the future, the car companies that will survive are those that have terrific credit, and low borrowing costs. That means Japanese and Germans will own the car business entirely in the end, and countries with higher borrowing costs (like America and Brasil) will not be competitive. Luckily Ford is so frugal, due to the lingering spirit of its founder, that they can hold out. One thing strongly in favor of leasing is that you have zero maintenance costs typically. The repair risk is significant in luxury cars.

When you buy a 10 year old BMW, if the tranny goes, it costs a fortune. Having a superb car for 30 months for a few hundred bucks a month is something a lot of people enjoy doing. Who can blame them? you spend an hour or two a day in your car, why not live in a nice place?

-1

I must say, I can't completely agree with the tone of most of these answers. I think there may be a good reason to buy a new car, or a luxurious used car.

For years I drove old, second hand cars that were really cheap. and unreliable. I can't count the number of times I was left stranded because my car didn't start, or the alternator burned out. I could have bought more recent models, but I was trying to save money. But in 2010 I found a very low mileage 2008 Smart Car for small money. It was a good deal at the time. It was almost new, having very low mileage, and about 60% of the price of a new, less well appointed Smart. I found out that I really like driving cars that won't break down and leave me stranded in sleet or ice storms. When my wife's Mazda hatchback finally rusted to the point that it wouldn't pass the safety inspection and couldn't be repaired, we bought a new 2013 Toyota Rav4. We are really happy with it. It's probably not a luxury car to you, but having reliable heat and air conditioning seems like luxury to us, and we are happy with our decision. I get the Smart serviced at the Mercedes shop. They have very nice coffee and pastries, and very fast free wifi.

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