What Kind of Car Can You Afford On Minimum Wage?
Rough times call for creative solutions. But you can afford a car on minimum wage. Here's how.
Talk to economists and you'll find a lot of debate about the minimum wage. Supporters say that by ensuring a certain level of income for American workers, the minimum wage increases the standard of living, stimulates consumption and motivates workers. Critics say that a minimum wage — or, more aptly, the higher labor costs associated with it — hurts America's competitiveness in the global marketplace. The one thing that nobody seems to debate is that trying to live on minimum wage in America sucks. In fact, the only thing worse than the minimum wage is no wage at all.
So what does all of this financial talk have to do with cars? Recently, the editors at MSN Autos debated whether someone could afford an automobile on a minimum-wage income. Unfortunately, the discussion raised still more questions. So we decided to find a definitive answer.
Can someone afford an automobile on minimum wage?
Understanding the Minimum Wage
We discovered good news and bad news. The good news is that people at the lowest income levels are driving better cars than they used to, says James Sullivan, a University of Notre Dame labor economist specializing in consumption habits of the poor. The bad news is that trying to afford and maintain any car at that income level is a soul-sucking exercise in thrift.
Why is that? Let's start by attempting to wrap our heads around the idea of a minimum wage, which is more complicated than you might think. That's because, as it turns out, there is no single minimum wage. There is a federal minimum wage, which was last updated in 2009 to $7.25 per hour. But there is also a variety of state laws regarding minimum wage. Some states, such as Louisiana and Tennessee, have no laws defining the minimum wage, which essentially means the federal minimum wage applies. Some states, such as Minnesota and Georgia, have minimum wages that are lower than that of the federal government, which still means that most employees get the federal minimum wage. Many states have a minimum wage that is pegged to the federal minimum wage. And then there are states such as Connecticut and California, which have minimum wages higher than what is federally required. The highest minimum wage is in Washington state, where residents are guaranteed $9.04 per hour since January of 2012.
Crunching the Numbers
So let's start with the best-case scenario and say that you live in Washington state — MSN Autos' home base — and you earn $9.04 per hour. And let's say that you have a full-time job working 40 hours a week for 52 weeks a year, which would make you a statistical rarity. (Let's ignore, for the moment, things such as health care that could take an instant bite out of that paycheck; that's a political can of worms for another article.) Such employment would give you a base salary of $18,803 per year.
Obviously, that doesn't mean you can spend the full amount on a vehicle. To get some real-world numbers, we spoke with John Abowd, director of the Labor Dynamics Institute at the Cornell University Department of Economics, who pointed to the federal government's Bureau of Labor Statistics' Consumer Expenditure Survey. This insanely detailed document examines how much people spend in a year on all kinds of goods and services and breaks down the data by income bracket. A yearly income of $18,803 puts you in the bottom third of income distribution, and for a single person that's only $7,913 above the poverty level of $10,890, a figure from the 2011 US Department of Health and Human Services poverty guidelines.
Economists warn that the statistics in the survey can get a little wacky, since they are household averages that can be skewed by all sorts of behaviors. Even so, they are good for drawing broad conclusions. According to the survey, transportation is the third-biggest yearly expense for poor people, behind housing and food, costing the bottom 20 percent in America 13.7 percent of their income, or $2,868 per year. That's $239 a month to cover the cost of a car, insurance, gasoline, maintenance and any finance charges involved with the purchase or lease of the vehicle.
What Kind of Car Can You Afford?
The data show that a small portion of low-income drivers are managing to buy new cars, but that the vast majority is shopping the used-car market -— and that's not a bad thing. Driving a car that's five to 10 years old used to be a reliability and safety nightmare, and older cars offered few creature comforts. But as Notre Dame's Sullivan points out, poor people now own much better cars than they used to. The cars likely have safety systems such as airbags and antilock brakes and, according to J.D. Power and Associates, are quite reliable.
So let's take a look at five vehicles you can get for less than $239 a month.
The 2011 Kia Rio has a base price of $12,295, making it the cheapest new car on the market. So if you finance a Rio for 60 months at a typical rate of 5.3 percent, and if you put $1,000 down, you're still talking about a monthly payment of $227. You've now blown 94 percent of your $239 monthly budget, and you haven't yet factored in gas, maintenance and insurance. You could probably get a slightly better monthly rate by leasing, but then you're gaining zero equity in the vehicle. Regardless, the BLS figures show that some people in the bottom 20 percent income bracket are, indeed, buying new cars, and those few would benefit from the lower maintenance costs that come from a new and warrantied vehicle. What you won't get, however, are a lot of creature comforts — power door locks and windows, air conditioning, etc.
2002 Toyota Camry
You can do a lot better shopping for used cars. A quick online search using MSN Autos' new Decision Guide found a 2002 Toyota Camry LE with 111,306 miles for an asking price of $6,951. If you manage to scrape up a $1,000 down payment and get that 5.3 percent interest rate, you could buy that Camry for $113 per month. For about half the money of a tiny new Kia Rio, you would have a far more spacious Camry with a record of reliability and plenty of useful miles left on it.
2004 Ford F-150
Our Decision Guide search also surfaced a 2004 Ford F-150 pickup with 46,500 miles for $6,000. If your minimum-wage job or your lifestyle requires hauling stuff, you could hardly go wrong with the F-150. Sure, this isn't the most desirable model — at $6,000 you're getting a 2-wheel-drive model with a standard cab and a V6 engine, so don't get excited about hooking up a tow package. But this is a low-mileage truck with a lot of utility and a good reputation, and it's equipped with airbags, antilock brakes and a CD player. And with $1,000 down and a 5.3 percent interest rate, you're looking at a bargain monthly price of only $95.
Yes, we're suggesting a minivan. For $5,490 we found a 2003 Chrysler Town & Country in Florida with only 73,000 miles. Chrysler being the company it is, we checked J.D. Power and Associates' reliability ratings and found the 2003 Town & Country earned a respectable three out of five stars for overall dependability (although only a troubling two stars for powertrain reliability). With first- and second-row captain's chairs, plus the third-row bench, you could drive a seven-person army around in this thing. Or you could just throw all of your stuff inside and live rent-free. Well, not exactly rent-free. With $1,000 down and our hypothetical 5.3 percent interest rate, you could live in this van for $85 a month.
2000 Lexus ES 300
We'll leave you with this last little gem: a 2000 Lexus ES 300 with 68,000 miles for $7,950. It's basically a luxed-out, albeit slightly older, version of the Camry discussed earlier, for around a grand more. For that you get leather seats, alloy wheels, power everything and a somewhat tarnished prestige badge that is still pretty impressive, even with a few wrinkles on it. Give it our $1,000 down, 5.3 percent loan treatment, and that's $132 per month — $95 less than a compact, roll-down-your-own-windows Kia Rio, and with just enough left over for gas and insurance. That's a reasonable budget for the bottom third of the income distribution, but with luxury befitting the top third.
Sam Foley is a Connecticut-based automotive journalist who has written for GQ, Forbes, USA Today, the New York Post and various other publications.
- Visit MSN Autos' "Exhaust Notes" blog to keep up on all things automotive.
- In the market for a new car? MSN Autos is pleased to provide you with information and services designed to save you time, money and hassle. Click to research prices and specifications on any new car on the market or get a free price quote through MSN Autos' New-Car Buying Service.
Must-See on MSN
First of all, no one finances cars older than 6 years. If they do, then it will be at 29% for less than 24 months of payments. We call those "Buy here, Pay here" dealerships because they finance the sale themselves.
Also, if the assumption is $239/month for payment, insurance, gas, and maintenance, then you have a big issue here because the insurance on a financed car is rarely pretty and can be more than the payment itself.
This article is simply poorly thought-out. In fact, it demonstrates the fact that people on minimum wage are stuck purchasing used cars with high mileage and crossing their fingers that something doesn't happen before the next tax return.
A: Rent 800+
B: Utilities and expenses 300+/- being lucky that is, some people pay at least 500+ on electric bill
C: insurance, registrations, taxes, gas, car parts (if lemon car) 900+the very 1st time, afterwards if lucky 300+ month, that is, full coverage, otherwise kiss it good-bye on accident
D: by the numbers $8 an hour, that is minimal wage, doesn't even add up to the expenses, already may be owning 500+ just on the car itself, depending on the brand, 3000 to 6000 a decent car, that's 1/4 of your whole salary on the year.
If you don't have perfect credit, a loan for $12,500 for 36 months (due to age of car being 10 yrs), will get you an interest rate of 35%, and a payment of $347/mo. That doesn't include insurance, gas, repairs, a warranty that only covers major overhauls with at least a $50 deductible. Now, that's more realistic Mr. author, and JD Power.
$18,800/yr is $1567/mo. If you allow $150 for food, $50 for electric, $100+ for gas energy, $700 rent, $150 (tv, phone & internet), $150 gas for car, $10 for oil changes (based on $30 for 3 months), $35 laundry, $340 car payment, $150 car insurance.. = $1800.. did someone say minimum income people can afford a car? new or used? Not even senior citizens can afford to purchase a car (new or used) on $1567/mo. Most seniors do not even receive $1500/mo with SS and a small pension. Now there's medications, doctor visits, etc. You're in a hole before you even think of another car.
I have a 1998 Pontiac Grand Am, paid for. I receive a small pension + SS for about $1500/mo. My car is now 13 yrs old, and that's pretty good for that car. I had to replace the engine in it, water pump, a/c unit, and exhaust system. The car has a hole in the floor board under the driver's feet, so the carpet gets drenched. I might get $500 for it as a trade in. I carry PLPD only and it's $100+/mo.
These are realities, sir, not your article. I could only get a 36-month loan on it, due to it's age at purchase. My credit is not good (coming up, tho) and so my interest rate was 35%. The Kelly Blue Book listed it's cost at about $4800, but I got charged $8800.. must have been sleeping on that one. Add in taxes, license, etc., and it came up to almost $12,500.
The poor get poorer, because the more affluent get richer. And the costs above are pretty much based on one person, cause if you have 2 or more living on $18,800/yr, you are truly hurting. So, rewrite this article but doing it so it's realistic, rather than hopeful. It can't be done your way.
As a Car Salesperson, MSN needs to get a clue!
Most lenders will not lend to a person who earns less than $1800.00 per month ($10.38 per hour).
Most lenders will not lend money on a 2002 Camry with over 100,000 miles unless the person has a very high credit score, and the rate will not be 5%-6% more like 9%-10%.
Being certified on 4 brands of cars (Chevy, Cadillac, Subaru, Suzuki) and in the industry for 14 years, MSN is one of the worst sources for information about vehicles. Even down to standard equipment and prices. They need to get a clue.
I make much more than min. wage on my full time so. CA job. Also have two part time jobs that bring in more money. I have no house payment or rent to pay--house paid off.
Between paying for utilities, (which have taxes included in them) property tax, and fed, state and local income tax, not to mention high sales tax, I'm barely making it with my income. AND I have no car payment, (I've always just driven clunkers) and only liability insurance.
I CANNOT IMAGINE WHAT I WOULD HAVE TO SACRIFICE IF I HAD CAR PAYMENTS AND FULL COVERAGE INSURANCE TO HAVE TO PAY ALSO. I'm overtaxed in all ways and tired of it!
Mr. Sam Foley you really just need to be fired, or come up with some realism on what it would really cost a person making "minimum wage" to get a vehicle. To who ever was in charge of having this posted needs to be fired or demoted for the lack of "true" information.
Just as you have seen in all the other postings before me that we are truly not that dumb to fall for your advertisement crap.
MSN use to be pretty useful in information in the past, but this past decade you can see that MSN is all about the almighty dollar. Just like numerous other companies going for the buck instead of trying to keep loyal consumers..