If your car has started to fail or repair bills are mounting, it may be time for a replacement. But how many cars can you afford?

Financial expert Dave Ramsey has a simple answer: Only buy what you can pay for with cash. This principle can save you thousands of dollars and help you avoid falling into the trap of long-term debt.

Financing may seem easy, but it can cost more in the long run. According to Edmunds.com, as of the end of 2024, the average interest rate on a new car loan will be 6.6%, while the average interest rate on a used car loan will be 10.8%.

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That means financing a $30,000 car for five years at an interest rate of 6.6 percent will add more than $5,300 in additional costs. Ramsey's advice is simple: Avoid debt and stick with how much you can pay upfront.

To set a budget, start by looking at your savings.

How much can you spend without affecting other financial priorities? If you have debt to pay off or are saving to buy a house, these goals should come first. If you're trading in an old one, tools like Kelley Blue Book can help estimate its value and add it to your budget.

Ramsey also suggests a key rule: The total value of all vehicles should not exceed half your annual income. For example, if your annual income is $70,000, the total value of your car should stay under $35,000. This guide helps prevent you from investing too much of your wealth in assets that lose value over time.

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Depreciation is a big reason to think twice before buying a new car. According to a 2024 report from LeaseLoco, new cars can lose up to 20% of their value in the first year and nearly 50% within three years.

Ramsey recommends avoiding buying a new car unless your net worth is at least $1 million. Choosing a reliable used car can save you thousands of dollars while still providing a reliable ride.

It's also important to consider the costs of owning a car beyond the sticker price. AAA estimates that by 2024, the average annual cost of owning a car (including fuel, maintenance and insurance) will be $12,297.

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Luxury cars tend to cost more to maintain and repair than standard cars, according to CarEdge. For example, the 10-year maintenance cost for a BMW 7 Series is about $14,768, while the average maintenance cost for a standard Toyota Camry over the same period is about $4,203.

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