Percentage of monthly income spent on a car?

sergeym

There is a big difference between someone making $30K a year and spending $250/month on car loan and someone making $150K a year and spending $1,500 a month on a loan. Even though percentage wise you spend more in the latter case, in this case you also have much more disposable money. When you making $30K/year every dollar counts with $150K you can decide how you want to waste you money. Expensive cars, jewelry, traveling, eating-out and so on. So I do not believe that car loan/income percentage really makes sense.

zueslewis

manamal

I prefer to look at the cost of the car relative to annual income, rather than cash flow. Of course, for payment buyers, it is strongly related.

For me, my first car was 80% of annual income (way to high, but finishing school...whinin 1 yr that was 25%. Next car was 30%; next car was 25%; next car was 35% but with a large down payment. Final two cars were 28% and 22%, both with large down payments.

bretfraz

But it seems most every American consumer disagrees with Sergey's thoughts. After spending over a week in Orlando and the racing at Daytona I can't imagine all those people are making $150K and have money to burn.

zueslewis

requirements for debt-to-income ratio. There are levels the lenders won't exceed, unless income is through the roof and there are other assets and/or a long-time business relationship.

rivertown

I think SergeyM's got it right.

It can go just like tboner above said - 'of course we bought 1/3 of the house the bank says we can afford, so we can buy too much car, LOL' - and never raise a lender's debt/income red flag. And like, Serg said, that's easier to do if income's larger. And, LOL, that all supposes higher income households need to comply with retail lender guidelines, which isn't always true either.

Tempest in a teapot. Serg and T are saying the same thing. It's a matter of personal priorities.

stickguy

just think of it as fixed and discretionary income. SOme portion of everyones income is spoken for (including a budgeted amount for cars). Beyond that is the discretionary money, which can be used for more cars, or something wasteful (whatever floats the old boat).

So, it makes sense that a high income person can spend more under this model.

tboner

I'm beginning to think I don't have too much car as not enough house. I'm only at 11% on the payment POV. Of course, my raise just kicked in, so perhaps that's back on course.

However, considering the number of miles, my entire expenditure is pretty high. But still not over 20% of my household gross. The total number is staggering so maybe I better stop adding it up and tracking costs on my PDA.

TB

lemko

...gross or net income? If I went by gross income, a Mercedes S600 would be quite reasonable. The person who is making $30K really has an income of around $21K. There aren't many new cars out there one can own for a $210 monthly payment for 36 months - not without a collossal down payment. The guy or gal making $30K is more concerned with basic necessities like food and shelter.

jasmith52

I heard a vice-president of General Motors talk about this very subject. If you look across many households the average amount that a family devotes to car payments is about five percent of gross income. So for example if you or your family makes $100000 then you would expect that you/their payments would be about $5000 a year or $400 a month or so. If your family makes $50000 a year then cut the payment amount in two to $2500 a year (perhaps were talking used cars here).

There are always exceptions, either way, however this is a pretty good rule of thumb to judge if you are going overboard on the car payments. Don't judge how much car you should have by how much money the banks will loan you.

andre1969

...I dunno how they figure it with cars, but when it comes to getting a mortgage, they only want to see a maximum of 28% of your gross going toward housing expenses (principal, interest, taxes, insurance) and 36% total debt (PITI + car loans, minimum credit card payments, etc).

So I guess basically, if you've bought the most house you can afford but don't carry a credit card balance, then about the most biggest car payment you're going to be able to afford is 8% of your gross.

I can kinda see Sergey's earlier point though. Let's suppose I got a raise that came out to $100 per month. Actually, I think that's about what my last raise came out to! Well, you'd think then that I'd be able to take on $100 a month more debt, but not be worse off. Truth is though the mortgage company would only let me take on $28 more debt for housing, and $8 a month for everything else.

I guess they figure the more you make, the more you're going to blow.

ghulet

As I have two tip-dependent jobs, my income can vary widely. And as I own a very old used car, my auto expenses also vary widely. Some months, all I do is put gas and oil in my car, but last month, for example, I spent $1100 on car repairs, which was probably about half my net income. Big ouch.

I don't know that it's necessary or even advisable to put an exact percentage of income one should spend on a car payment. I think debt to income ratio is much more important. Lots of families make $100k or more a year and are basically broke. Other families make $50k combined but are debt-free, own their home free and clear, etc. I think money management skills are really a lot more germain to the discussion than income.

bretfraz

My perception of Sergey's post was that since some people make $150K then they can afford to blow all the money they want (within reason) while the person making only $30K can barely afford to blow his nose. While there are examples of that scenario, there are also plenty of examples of yours too.

As someone who has been on both sides of this income spectrum I can tell you its very very easy to get into financial trouble making $30K as it is $150K. No one is stopping you from wasting money just because you only make $30K.

Since everyone has their own definition of what is affordable, and everyone has their own comfort level regarding financial risk and liability, this whole conversation is 100% moot. The only "rule" is that there are no rules.

Regardless of what you make everyone has the opportunity to destroy themselves financially if they so choose. Who cares about % of Gross Income when you've hopped on the train to Financial Hell.

ghulet

I'm gonna go out on a limb and say it's easier to get into financial trouble making $30k than it is making $150k. Banks in the U.S. are perfectly willing to allow you to 'dig your own grave' financially. If your income is high, at least you can generally dig yourself out a bit more quickly, and you have more left after 'essentials' to make those payments. Quite often, those making $30k literally have no money left after rent/mortgage, utilities, transportation and food.

That said, it perplexes me that it's generally quite easy to borrow (and way too much) money for a car, while getting a mortgage, for many, is next to impossible without finding your grocery receipts from 1989.

I imagine if the car lenders actually stuck to a 'ten percent of income' or some type of fixed debt-to-income ratio, they'd sell about a third the cars they do now. The automakers and associated lenders are all too willing to loan more than buyers can really afford.

blh7068

"... in this case you also have much more disposable money."

That's assuming all other expenses between the 30k and 150k salaries are equal, correct?

lemko

...I know a guy whose mortgage alone exceeds my combined monthly expenses. He makes about double what I do. His children's day care alone is $600 - far more than my car note.

ghulet

It always 'seems' like we'll have so much more money 'left over' if we were to make ten, twenty, fifty thousand dollars a year more. Unfortunately, reality usually dictates that 'the more you make, the more you spend' cliche proves true. Things that weren't 'essential' suddenly become part of your everyday life, you soon 'can't live without' the WEGA TV, three cars, five bedrooms, a vacation house. The more that comes in, the more goes out.

blh7068

"Things that weren't 'essential' suddenly become part of your everyday life,..."

Girlfriends become spouses, surprise, baby on the way...

I found myself saving more money when I was a GS 5(gov. payscale) than my current grade.

You made my point concerning all other finances being equal, which likely will not be the case. With increasing income, all those wants and desires start coming to fruition.

jlawrence01

Last year, in my spare time, I did a lot of research on personal bankruptcies and had on-line access to the public filings of the US Bankruptcy Court, Northern Illinois Division.

While it is dangerous to make broad generalizations, I noticed two distict patterns in the filings in 2000-02. First, if the family income was less than 30k, generally, the precipitating factor in the personal bankruptcy was an unexpected medical bill that was not covered by medical insurance. Also, a lot of the car loans were from the "tote the note" lots that are on every corner in Chicago.

If the family income was 80k and above, and there were A LOT of them with even larger incomes, it was generally due to lifestyle issues. That is, there was a home mortgage that was generally 80-125% mortgages and generally two late model (<2 YO) cars. Also, add tons of credit card debt.

Oh well.

prophet2

It's a bulls-eye for "ghulet." Whenever people get the big raise, or huge bonus, they find that it doesn't go quite as far as it is supposed to. The net after-tax amount renders it quite a bit smaller, but it's really the transition of "wants" into "needs" that does the trick.

It isn't just the cost-of-living going up which wreaks havoc with budgets. It's more likely the increase in the standard-of-living that does it, time and time again. After all, gotta keep up with the Joneses .........

jasmith52

described above with high incomes and too much life style debt. They are called losers. And there's way too many of them.

I have a house that I rent out to people and I have noticed a trend for renters. They have great new cars (with big payments), great furniture, and truly awful credit. I guess that's why they are renters at the point in life when their peers have nice houses of their own to live in.

sergeym

So, you are saying that someone who can afford to rent a nice (I hope it is nice) house for say $3K/month (NYC prices), 2 nice cars for say $2K/month, buy expensive furniture, designer cloths, travel world in style and so on - is a loser because he/she does not own a house. But people may just have different priorities in this particular moment in life. They may want to be free to move to another city or even country and so on. BTW if their credit is so bad then how they got all those expensive things? Paid cash? If they have enough cash to buy 60-70K car out-right they must be doing pretty well. I would not call them losers.

andre1969

...but I never could understand the concept of renting if you already make fairly good money. For instance, in my neighborhood, if I rented out my condo I could probably get about $1200-1300 a month for it. Well, you could probably buy a similar unit for about $1000-1100 a month (condo fee included) with a minimal down payment. You might have to save up $5-8K though to cover closing costs, so that might be what stops a lot of people...saving up that initial amount.

Still, you can write off your mortgage interest and property taxes, so the net effect would probably be that you're only spending about $700-800 a month. That $500 or so you're saving, versus renting, would pay down that initial $5-8K pretty quickly, and then give you a nice chunk o' change to play with after that.

Maybe in some areas it's actually cheaper to rent than to own, but it doesn't seem that way around these parts, any more!

thel

Usually buying a house is a good investment (unlike buying a car LOL) b/c one can usually sell a house for as much or more than they paid for it.

I can also see Sergey's point. Someone who moves a lot wouldn't necessarily reap these benefits and the ability to cut and run would be convenient for them.

Now back to the topic. So lenders use a 38% debt to income ratio as a guideline. Does this include student loans as well as mortgage and car payments?

zueslewis

It includes all debt - basically anything listed on your credit bureau.

andre1969

...where 28% is housing debt (mortgage principal/interest, taxes, and insurance) and 36% is total debt (the housing + installment loans such as car notes, student loans, credit card minimum payments, etc)

zueslewis

and REALLY want the money go as high as 48-50%.

If you've got 50% listed on your bureau, you're a BK/repo waiting to happen and your kids don't get to go to Mickey D's very often.

andre1969

...now that's pretty scary! In my case I see roughly 64-66% of my gross paycheck, after taxes, 401k deductions, etc, so that wouldn't leave much of a margin for me!

zueslewis

that would look at 50% DTI ratios - they also charge 17-28%, because they know the risks they're taking.

lemko

My housing expenses are only 19% of my net monthly income. I don't get credit card minimum payments. If you only make the minimum payment on a credit card debt, you'll never live long enough to pay it off. If I can't pay my credit card debt off in full, I pay at least double or triple the minimum payment due + the finance charge.

andre1969

I'd say you're doing damn good! Now what you need to do is go out and buy a much more expensive house, and then start trading in your Cadillac every year, rolling the negative equity into the new loan! ;-)

andre1969

...just out of curiosity, what were the interest rates for the 48-mo and 72-mo loans on your Cruiser? I figured that there'd be a bigger difference than just $48, between the two! Was the 72-mo at a much higher interest rate?

lemko

...I've often entertained the thought of getting a less expensive car the next time around. I'm hoping to get a good ten years out of my STS. My '94 DeVille served me well for eight. You save massive amounts of money w/o a monthly car note. My girlfriend's base model Impala really is all the car I'd want and need for daily commuting to work and grocery getting. Using the STS for such purposes is like using a thoroughbred to pull an ice cart. Best of all, her car payment is very modest. I'd still have my immaculate 1989 Cadillac Brougham for special occassions or a night on the town.

tk865

As for the rent vs. buy argument, I currently rent, though my rent payment would make a house payment. However, the house my rent payment could afford would be, by necessity of pricing, in an undesirable area. I would live father from work, and have more security concerns due to neighborhood, as well as all the added expenses and liabilities of owning a home. I personally can't realistically consider moving into a "liveable" house until my income about doubles. Then I might be able to take on the burden of ownership. As it is, I have no car payments, and my largest monthly bill aside from rent is the cable ($80), with utilities a close second. Sometimes renting DOES make financial sense.

lemko

...get houses in the city of Philadelphia for less than the cost of your average midsize car. However, you'd better be as big as Hulk Hogan and have an arsenal of weapons to live in the neighborhoods where such houses are located.

Then there is the prospect of being "house poor." You can have a beautiful house, but all your money goes to the mortgage. You're uninsured and driving a rusted-out '76 Pacer, eat ramen noodles for breakfast, lunch, and dinner, and your kitchen table is an old cable spool.

zueslewis

48 months was 6.9% and 72 was 8.25% - through Chrysler (I took the $3,000 rebate!).

stickguy

OT I know, but you got me interested in the GT cruiser now. In addition to the rebate, what kind of deal did you get? It seems that 5 speeds are rare, but how are they selling in general?

Just sounds like it might fit my criteria (not too big, pretty quick, stick, moonroof with headroom left over, and flexible utility value, in a reasonbly cool/styligh/unique package).

zueslewis

and I really wanted one, but I'm happy with the autostick, especially now that I'm looking at a very low mileage '93 Miata for autocross duty.

I paid $400 over, and there was a $2500 rebate plus an additional $500 (here in the Philly area) that was regional because of the recent auto show.

The car is surprisingly fast. There's some torque steer when you jump on it, but it's about normal for high powered front drivers.

I looked at several GTs - I chose a silver one with cloth and no roof - I'm bald, so the roof is useless to me and I don't really care for leather except in big rides.

The dealer I did business with (there's more to the story, involving my trade, so I won't recommend them) had 11 GTs on the lot, all except the one I got had leather and a roof with the autostick.

ghulet

I _really_ wish I'd have bought a condo here in Chicago five years ago or so, because they've gone up dramatically (many more than 100 percent) since then. It's at the point where it's literally impossible to buy a two-bedroom condo for less than $200k in a reasonably nice neighbhorhood, close to public transportation, at least on the north side. Most are closer to $300k. Unless you have a decent down payment (at least $20k) and plan to stay in it for a while, buying a condo isn't the grand scheme it once was, if you compare rents to mortgage plus taxes and assessments. I guess I just don't think their value is going to double again, especially not in this economy.

Back to cars, I guess!

andre1969

...I'll quit whining about how expensive my neighborhood has gotten, then!

bretfraz

Heck, I wish I'd have bought a loft on the near north side when I moved there in '93. Or bought one of the units in my apt bldg that was going condo in '94. Could have bought a rehabbed 1 bedroom on E. Chestnut for about $180K. Prolly worth $300K now..... oh well.....

jasmith52

In Reply to your post about people who rent a 3K house drive 1K/month leased cars have great designer clothes and who travel the world.

The people who I rent my house to are like this. Yes it would be great if they could really afford it but in reality they can't and their crappy credit shows it. These people (and there is a lot of them) are going to have to cut way way back on their consumption in the future either by choice or more likely because no one else will lend them more money to bankroll their consumption.

The discussion was about people with excessive lifestyle with respect to their income. And in my mind these people are indeed losers. They get to work until they are really old with the prospects for diminishing lifestyle. And for what - a fancy car and some nice clothes. It's their choice and in my opinion they have been very foolish.

lemko

People like this are "frontin' and maxin'." There's a song by a R&B group The Powder Blues Band that has a song to describe them called "Secret Success" The stanza lines goes like:

I drive a big black Cadillac I ain't even paid for yet.

I had to sell off the funiture just to pay the rent.

I wear expensive suits I can't afford to clean.

So I freshen my old rags and seldom make the scene.

They think I'm rich - that's just a guess.

It's secret success!

It's so secret I don't even know about it!

tpat3

on the "Too many cars for the rich" thread. I keep thinking it's just me who can't figure out how so many people are driving expensive vehicles for commuting and errands. I've got a 2000 Silverado and my wife has a 2000 Accord. We live in an expensive town, but I still can't figure out how or why my neighbors drive $50,000 commuter vehicles.
I know credit is easy but paying 20 percent or whatever of your income for something that depreciates 50 percent in four years sounds crazy to me.

thel

eharri3

I am 23, made 48K this year, and just purchased the first vehicle I ever bought for myself. I paid 24 before tax and 4.9 financing, and that seemd like a heck of alot of money even to me, but it's what I wanted, Im single, with no other debts or responsibilities, and I figured I dont know if changing circumstances in life will ever let me live like this again once family and kids come. Plus 5 years with a two seater with no air conditioning was grating on my nerves a bit. The payment's 388 a month for 60 months with 5 thousand down, but I plan to pay over 400 and do it in 4 years or less. I have almost all the cash, but I figured when I compare what Im getting on my investments to the interest they're charging me, the actual difference between what I'll pay and what that money will make me over the next 4-5 years is so tiny that financing seems the better route. Hopefully by my next vehicle 25K will be such a drop in the bucket for me that I can write the check and not miss the money too much.

 I actually know people at work who talk about buying 34-35 thousand dollars worth of car and it boggles my mind. That's actually why I had to decide to buy my second choice vehicle instead of the dream truck Ive lusted after for 5 years. Just couldn't bring myself to spend more than mid 20's on a vehicle, despite what all the full sized truck owners at work kept telling me about how the payments on an F150 or a Dodge Ram would only have been such and such an amount more per month than on my Dakota Quad Cab. Some people made fun of me when I showed off my Dakota for not paying a little extra per month for one of the more expensive full sized pickups.

 Seems like the norm for most people to think in terms of what you can get for a certain montly payment. The salesmanager at my dealership kept suggesting if I didnt like the payments that I try a 72 month payment plan, and I had to explain to him like 10 times I wasn't drawing the payments out any farther than 60, though it would be paid for even faster than that, and if the final price of my vehicle would make the paymentes at 60 months more than I was comfortable with it was time for me to look at cheaper vehicles.

Most of my co workers do get bored with a vehicle and start thinking trade-in before it's fully paid off. Others talk all about how they're 'used to' paying 350 per month, so if the new dealer can make it happen for about that and it doesn't cost them any more per month to trade they'll be happy. I even know one guy who makes less than I do paying almost 600 bucks a month on a BMW 5 series.

When I talk about how I plan to run this truck for twice the length of the loan at minimum and my goal is never to have to finance again, they look at me like Im a nut. One guy even tells me I dont seem to know anything about the right way to handle car purchases, and it's better to just trade up every couple years while your car is still worth something.

prodigalsun

Well, that's why I buy used. Just picked up a loaded 02 maxima for 18K, list when new was around 30K. Just doesn't make sense in my mind to spend so much on a depreciating asset.

My financing was 4.75, 5 years.

That's funny about trading up while your car is still worth something. Trading in is a suckers bet, unless you can save decently on the taxes.

eharri3

Except I purchased a domestic. Seems like there tends to be more cash incentives on those, to such an extent that I wasn't getting get a particularly large discount by choosing a 1-2 year old low mileage model over a new one. Didn't really seem sufficiently worth it for me to loose out on putting the first miles on the truck and knowing its history from day one.

 On the other hand, the imports tend not to have much dealer cash offered. So depriciation makes buying used more of a deal. For my truck the way it was configured I was looking at MAYBE at tops a 2-3 thousand dollar discount or so for a 1-2 year old model with 20-30K on the clock. And that's assuming I wasn't gonna buy the extended warranty, which I probably would have.

stickguy

hard to tell if you really are better off. MSRP might have been 30, but with rebates/discounts, maybe paid 26k (for arguements sake). So, dropped 8k. But, in 2 years, you might be loking at 10-12K (trade/private) or so, in which case you "lost" about the same, or a fewK more (plus finance charges), which will be partially offset by the new car experience, and less maintenance (no tires/brakes, etc).

I just ballparked these numbers as an example (but based on my '99 maxima), but I do feel that it is not always so cut and dried which way is better.

Like E said, really depends on the specific car and deal

michaellno

lessee, I pay about 11% of our combined gross income (mine and wife's) on our house payment each month, and about 10% on our auto loans.

Like others, I could buy a lot more house for what we earn, but, with our kids being teenagers and not too many years from being gone, why would we need a bigger house?

Same with our cars. Just got rid of our '02 Explorer and replaced it with an '03 Focus. Rarely do we all ride together anymore (the kids are 17 and 15), so having a large vehicle didn't make sense for us.

my .02