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Percentage of monthly income spent on a car?

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Comments

  • eharri3eharri3 Member Posts: 640
    Actually I got a large, high horsepower vehicle because I like the look,feel, and utility of driving a truck, and accelaration and performance is important for me. I have been told that there is no overcompensation necessary.
  • lemkolemko Member Posts: 15,261
    ...if you a looking to impress the ladies, owning your own house is better than owning a fancy car. It doesn't look good to have a fancy car and live in a shabby apartment. Worse yet, if you drive your date home in your 7-Series Bimmer to Mom's house where you live in the basement.
  • 1racefan1racefan Member Posts: 932
    "I realize that telling a girl at a bar that you drive a Bimmer or whatever you get for $500/month lease may be impressive. But, having a house is more impressive." - TRUE

     

    I know a kid that bought a 30K out the door car back in 2002. This kid was grossing about $3000 / month back in '02 when he bought the car new. He financed it for 36 months, 0% interest, and had a payment of about $800/month. Well, he was 23 and still living with Mom and Dad, so he thought he could afford to do this. Then after 2 years of this $800 payment, he decided he needed to get his own place. With an $800/mo car note, and looking at a potential apartment lease of $1000/mo, he decided that he needed to get rid of the car. I think he was actually netting about $2200/mo. He ended up trading the car in, for a very nice, but more reasonable car (after making 24 months worth of payments on the previous car) - and now has a payment of about $350/month. The sad thing is that he is now 26, and will be getting married soon, and is just now beginning to save up for a down payment for a house. Looking back, if I could have lived with my parents until I was 25 (rent-free), I would have had a heck of a down payment stashed away to go towards a house. I love cars as much as the next guy, but at some point you have to realize that for the most part (there are exceptions), they are a bad investment. I often joke with my friends that if I was one of those guys making millions a year, I would be the type to have 10 high-end cars - but I would also have a really nice mansion too...
  • davv62davv62 Member Posts: 76
    "My vehicle is a material object that is there for my enjoyment. It should be a slave to me, not the other way around."

     

    Dude, this is my philosophy exactly. It's amazing how many people forget this, and end up being a slave to their material possessions.

     

    I have a big pet peeve with leasing. People in poor financial circumstances often lease because the payment is lower in the short run, and it allows them to buy a more expensive car than they could otherwise afford.

     

    A relative of mine, in poor financial circumstances, leased a Jeep about 5 years ago. The lease was up two years ago, but she couldn't turn it back in because (1) she couldn't afford even to lease a new car; and (2) the car had unrepaired damage that she would have been heavily dinged for, that she couldn't afford to fix.

     

    So she "rented" the car for another 2 years, and now it's up again. The car is now 5 years old, in about average condition for a car that age. She will keep paying on this car, and will never own it.

     

    For people like this, leasing is a trap. Getting a car you can't really afford often comes at a high price.
  • steinstein Member Posts: 18
    It is funny to read the posts here and think about my own situations.

     

    I was married at 24 and had tons of debt and bad credit. We had a piece of junk that was costing us a few hundred a month in repairs, but I didn't have credit that would allow for a decent payment. The mechanic I used started a used car business and sold me a car with him financing it himself ('93 Grand Am with 10K miles for $10,000 in 1996).

     

    Needless to say, I am now 34, my credit is golden and my family has a considerable gross income.

     

    We currently own a 99 accord and lease a '02 subaru which is coming due. We are trying to decide what to replace it with. We would love to lease a luxury SUV like an BMW X5 or a MDX, but are hesitant to spend $450 or 500 a month on a payment, which would be equal to about 3% of our monthly gross (and we have no debt other than our mortgage, which has a 60% LTV).

     

    It amazes me that people would spend such large portions of their income on a car.

     

    I know what will happen, my wife and I will talk and talk about the luxury SUV and end up leasing a Honda Pilot (which is a great suv, dont get me wrong) for $350 or so because we don't want to spend the extra $100 or $150.

     

    Just call me cheap.
  • anonymouspostsanonymousposts Member Posts: 3,802
    Right now we are paying about 15% of our gross income between 4 cars. Not terrible. Not great either. However, we have very little debt other than our mortgage and we are at about 75% LTV on our property not including any appreciation over the last 2 years. In less than a year and a half our outgoing on cars will decrease to about 10% and will remain there until we replace our leased Accord in July of 07.
  • manamalmanamal Member Posts: 426
    I am paying 7% of my gross to car, and 26% of my gross to the mortgage (40 % LTV thanks to appreciation), including taxes. And with this 33% debt load, money is tight! I can not imaging how people can do the higher payments.
  • anonymouspostsanonymousposts Member Posts: 3,802
    My figures were actually net income. The cars are about 14% of our gross and the mortgage is about 17% of our gross income. So 31% total with minimal additional debt (knock on wood). Again, it could be better but it could be a lot worse. At the current rate our mortgage should be paid off in 10 years or so. I will be 35 at the time and hopefully by then I will have come to my senses and not have 3 brand new cars and one spare.
  • corvettecorvette Member Posts: 10,238
    3% of monthly gross on a car is cheap, no matter how you slice it. If the MDX or X5 would make you happy, you should splurge and lease one.
  • stickguystickguy Member Posts: 50,441
    Keep in mind that a payment is only part of the equation. I just signed up for a loan for the first time in years, but it is still a shortish loan, and maybe 4% of gross (ballpark). But, I still have that wonderful 2K/year in Nj insurance, $150ish for registration fees, etc. to add in.

     

    That is just the fixed cost of course. Gas/repairs/maintenance, etc. are variable.

     

    I do like not having a payment. I'll end up doing what I usually do, take out a 3 year loan, and pay it off in 1-1.5 years (probably spring 2006 on this one).

    2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.

  • turboshadowturboshadow Member Posts: 338
    What is this and how do you calculate it?

     

    Turboshadow
  • gussguss Member Posts: 1,167
    Amount you owe on a loan divided by fair market value. Say your loan is $100,000 and you property is worth $300,000. You have 33.3% equity in the property.
  • stickguystickguy Member Posts: 50,441
    Close. Yo have a 33.3% loan to value ratio. Your equity is the inverse, or 66.67% here (200K)

    2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.

  • oneslackroneslackr Member Posts: 2
    If you want to lease a BMW X5/Acura MDX go for it & enjoy it. You can't take your $$$ with you.

     

    I wouldn't give that advice to someone who is broke or trying to live beyond their means.

     

    However, in your situation you state that a $450/mth payment would only be about 3% of gross monthly income & you have no debt other than a mortgage. If that's true then a payment of $450/month isn't going to make a dent in your wallet.

     

    I also have a few comments about the Acura MDX. I wouldn't spend the extra money on the MDX over a Honda Pilot. The Pilot is almost the same car for $10,000 less or so. Unless of course you just want the Acura brand name or love the looks of it.

     

    Nothing wrong with a Pilot if you choose to get one. We own a 2004 Pilot & it's a nice SUV w/heated leather seats, auto climate control, etc. It has all the bells & whistles.

     

    Not sure if you're aware of this but the Pilot also has the same engine (245hp '04 Pilot/MDX put out a bit more), automatic 5-speed trans, all wheel drive system, and chassis as the MDX. The MDX can seat 7 & the Pilot can seat 8.

     

    The Pilot also has a bit more cargo capacity, 90 cubic feet with both 2nd/3rd row folded down. Compare that cargo capacity to almost any other midsize SUV & the Pilot wins.

     

    Honda bumped up the horsepower in the 2005 Pilot to 255hp. I'm sure Honda bumped up the power for the 2005 MDX also to keep it above the Pilot.
  • chrpaichrpai Member Posts: 32
    Payment is a factor of many variables including term of the loan, interest rate, and loan amount. Loan amount varies based on cost of the new car, down payment or trade-in, or worse negative equity from the trade-in, and of course various closing costs and add-ons.

     

    So it's really impossible to answer your question.

     

    But I would say the most anyone should spend on a car is no more then they have to. Cars are not an asset or an investment, they are a liability. Your goal should be get the lowest cost of ownership per mile driven in a vehicle that meets your standards of comfort and style.
  • stickguystickguy Member Posts: 50,441
    right up until this line:

     

    in a vehicle that meets your standards of comfort and style.

     

    That's the loophole for most people. Otherwise, you really couldn't justify (from a purely functional standpoint) most expensive cars, higher trim lines, etc. No need for a Lexus ES when a Camry can do the job for 1/2 the price (or a Taurus, etc).

     

    Same arguement can be made for most goods though. TVs, even food/wine.

    2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.

  • chrpaichrpai Member Posts: 32
    Well I make that distinction because if you settle for something below that point you'll end up upgrading later which will cost you more money.

     

    I'd love to have alot of things and for me my line is at around the Camry/Malibu. I test drove a Cavalier ( had 2 of them when I was younger ) and it just didn't cut it anymore. I could have bought one but 6 months from now I'd be kicking myself and wanting a new one. $$$ Ouch.
  • hoju1301hoju1301 Member Posts: 2
    What determines how much a person can borrow for a car loan relative to their income?
  • danf1danf1 Member Posts: 897
    Most banks do not want to see your payment exceed 20% of your monthly income. This does vary from bank to bank, but that seems to be about the norm with the banks that I deal with.
  • lemkolemko Member Posts: 15,261
    ...is that gross or net income? I must've done pretty well as my car payment was nowhere near 20% of my net income.
  • danf1danf1 Member Posts: 897
    That's gross. Remember, banks want you close to maxed out so they can earn all of their interest off of your minimum payments.
  • lemkolemko Member Posts: 15,261
    20% of my gross? I guess a new S-Class or a 7-Series would be no problem! Only the most reckless and self-destructive individual would spend 20% of his gross income on a car! Of course, I probably did when I was younger and made less.
  • asafonovasafonov Member Posts: 401
    I remember reading Millionaire Next Door and saw an interesting perspective on car cost - as a percentage of one's net worth, and not income. The authors' conclusion that most millionaires (who self-employed enterpreneurs and professionals, not Donald Trumps or Bill Gates types) drive "middle class" vehicles and spend a much smaller percentage of net worth than an average American. If I remember right, F-150 was the most popular vehicle, followed by full-size domestics (Buicks, Cadillacs and Ford/Mercurys). The book came out in 1996, summarizing research over the previous decade.
  • gallileogallileo Member Posts: 51
    You've got to be careful with the "Millionair Next Door" and it's analysis. I agree with it's main point, which is "be extremely careful not to buy more car than you absolutely need", but it's numbers don't always support its conclusions as strongly as it would like.

    These numbers are from memory, it's been quite a while since I read it, but they are definitely in the ball-park.

    According to the book, "Less than 1/3 of the people they studied were driving expensive european cars less than two years old." Parse that sentence carefully.

    What it means is that roughly 1/3 of the millionaires he interviewed are driving expensive European cars less than two years old. That is a very significant minority--not the dominant trend, certainly, but enough to say that plenty of the people he interviewed didn't follow the advice he's about to give and are happily millionaires just fine.

    Now, read the sentence again.

    "Less than 1/3 of the people they studied were driving expensive european cars less than two years old."

    What would the percentage be if you expanded the time frame into three years? By limiting it to two years instead of three, he removes anyone who is in the third year of a lease, and who are essentially driving a new car in perpetuity.

    What would the percentage be if you expanded the class of cars to include Japanese and American luxury brands?

    I'm going to guess that if you broaden the category in just time and brand, you are well over 50%. Sure, the plurality of them may be driving F-150's. But that doesn't mean much.

    Again, "Buy *much less* car than you can afford" is a good message, but I think his picture is skewed.

    There are plenty of other problems with the book, but they aren't topical for here.
  • asafonovasafonov Member Posts: 401
    You've got to be careful with everything ;)

    You mention the statistics you cite are from memory - if they are indeed correct, I agree with your interpretation completely. Please feel free to shoot an email if you care to share your thought about the book.

    The point I was trying to make - which is perhaps more important to non-millionaires - is that the cost of a car as a proportion of one's next worth is a better criterion that the proportion of income. A kind of mental check - as in, "I perhaps should not be buying a car that is 10% or more of my net worth even if the bank is happy to approve the loan."
  • jaserbjaserb Member Posts: 820
    It always cracks me up when people use the bank as validation for a purchase. "Well, hey, the bank said I could afford it so I figured, why not?"

    BTW, I liked the Millionaire Next Door. As I recall, the percentage of millionaires driving luxury cars was legitimately pretty small. I seem to recall numbers much lower than those cited.

    -Jason
  • corvettecorvette Member Posts: 10,238
    I've read the book, and if all that's true, I'll probably never be a millionaire!
  • achenatorachenator Member Posts: 128
    That's all fine and dandy if you only think of a car as transportation. Many people, including me, happen to really like driving and cars. There are people who buy nice cars and think of them as "transportation." Unless I won the lottery I will probably always drive a more expensive and nicer car than is "sensible.' The milllionaire next door can keep driving his Taurus, this thousandare will be driving something more FUN. :D
  • corvettecorvette Member Posts: 10,238
    That's true about people who buy nice cars and think of them only as transportation. Then there are the enthusiasts who buy all sorts of cars, both nice and money-pits, because they truly enjoy them. Maybe MND-types have hobbies that are less capital-intensive.
  • carlisimocarlisimo Member Posts: 1,280
    "The point I was trying to make - which is perhaps more important to non-millionaires - is that the cost of a car as a proportion of one's next worth is a better criterion that the proportion of income. A kind of mental check - as in, 'I perhaps should not be buying a car that is 10% or more of my net worth even if the bank is happy to approve the loan.'"

    Uh oh. I recently started working as a project engineer, right out of school. No assets beyond what I've saved now that I am working, which is a smaller number than my school loans. I'm not sure I have a positive net worth at all. No car for me!

    I'm not being serious about that, but I disagree that percentage of net worth is a better criterion.
  • steine13steine13 Member Posts: 2,818
    "I disagree that percentage of net worth is a better criterion."

    It is useful to think in these terms, though. Comparing the commitment you make on a car with your income as well as your net worth is a really good idea. It gives you a sense of priorities and possibilities.

    Of course, for most people with a normal workday, a car is put-near a requirement. So decent wheels become an investment, and even if your net worth is "nothing" as you start your career, if the income is there, a $15 new Corolla is not extravagant.

    It'll get you around safely and comfortably, and lets you concentrate on work. At the same time, a two-year-old A4 for $25 would be a really bad idea...

    -Mathias
  • kyfdxkyfdx Moderator Posts: 235,221
    "put-near"?

    "put-near"?!

    They will never let you back into the Fatherland, now...

    However, come on down to KY.. and you'll fit right in...

    I thought I was back at Thanksgiving dinner out in the country, for a minute.... :surprise:

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  • bremertongbremertong Member Posts: 436
    The desirable percentage one spends on a car will vary from person to person depending on personal preferences.
    My method of calculating cost of ownership is Depreciation Cost most importantly followed by maintenance cost, and insurance. I have never taken out a loan to buy a car as to me it is a double whammy of interest expense and depreciation. For a younger person thinking about the future may I suggest the principal of saving 10% of net income as a nest egg for the future. If you have this surplus and are meeting all your essential obligations you should spend whatever amount you need to feel satisfied with your car. If your budget is in deficit you should spend as little as you can until you are at least in balance. I currently own a 2004 Cadillac Deville which I bought in great shape, 11 months old with 15,000 miles on it. I paid a little over half what it would have cost new.
    I like the idea of letting the first owner take a large part of the depreciation. I enjoy driving a nice car as long as it doesn't put to much of a strain on my wallet.
    I generally finance depreciation out of capital gains in the stock market so I am less likely to buy another car if I am having a bad year with investments. Maintenance and insurance come out of my operating budget and is a very small percentage of my scheduled income.
  • steine13steine13 Member Posts: 2,818
    I have never taken out a loan to buy a car as to me it is a double whammy of interest expense and depreciation.

    Agreed, but if you have a job and don't have money, and you figure you need a car to get around... there aren't too many choices.

    When I was in that situation, I chose the $1,000 beater route. Had fun, learned a lot, and spent not much less money over the years than if I had just bought a '93 Corolla new and kept it until yesterday... not too unreasonable, since I owned a '93 Corolla until 2.5 years ago, and AFAIK it still runs for a friend of mine.

    I sure would have changed fewer water pumps and had a lot more time for other things... I'm glad for the experiene, but I'm nost sure that I saved a lot of money, if any.

    -Mathias
  • exb0exb0 Member Posts: 539
    I have never taken out a loan to buy a car as to me it is a double whammy of interest expense and depreciation.

    I disagree with that statement. Two years ago I got a ~$27500 loan at 3.6% for 48 months. It was not a special rate; my FICO is excellent so I qualify for top rate. At the time money markets were paying 2%. So my total payments after 48 months will be $29760, however, $27,5 invested over 48 months at 2% is equal $29290, therefore I am breaking even. However, I have a piece of mind that if I temporarily loose my job or get sick; I have $27,5K to pay my bills with. Now money markets are paying 3.5%, so I am even better of by locking into low interest rate. Yes, if the rates are dropping, and the difference between what you are paying and what you are earning is greater than 50% you’re better of paying cash or paying off your loan if you are not willing to venture into higher risk investments like bonds and stocks.
  • bremertongbremertong Member Posts: 436
    I like your approach. If you need a car to have a job the
    idea of the loan on an inexpensive car makes good sense.
    Low interest on small loan and low depreciation on an already depreciated car.
  • bremertongbremertong Member Posts: 436
    Sounds like good logic to me given the set of circumstances you describe. I always say, never say never.
    So there will of course be individual circumstanes such as yours that would favor a loan.
  • nwngnwng Member Posts: 663
    very few people can "scale back" on their car payments/expense. e.g., I drove a tercel when I first started working. Fast forward ten years, will i be content driving a corolla/civic/cobalt ( I need a new car) if my income can afford a 3 series?
  • jlawrence01jlawrence01 Member Posts: 1,757
    Fast forward ten years, will i be content driving a corolla/civic/cobalt ( I need a new car) if my income can afford a 3 series?

    Why not? It depends on what your priorities and values are. There are a whole lot of other things in life than a STATUS sled.
  • carlisimocarlisimo Member Posts: 1,280
    As an owner of a budget car, I can attest to very real differences in what you get with a more expensive car. And I'm not even counting what's on the outside.

    There's also the debate... would I rather live a fancy-shmancy life now, or live it when I'm old or dead?

    (Not that I'm going to go buy a 3-series right now.)
  • jlawrence01jlawrence01 Member Posts: 1,757
    There's also the debate... would I rather live a fancy-shmancy life now, or live it when I'm old or dead?

    Or whether you retire at 55 or are working the drive-thru at age 70 ...
  • 1racefan1racefan Member Posts: 932
    ...Or whether you would rather put your money in an appreciating asset (or at least one that should not depreciate) like your house. Personally, I would rather drive an economy car, and have a shorter term mortgage.

    Plus, even with driving economy cars that are paid for, you can still buy a used toy (like a first gen Miata, used Mustang, etc...) for well under $10,000 to get some driving kicks out of.

    Admitedly, it is sometimes hard to resist temptation when there are so many cars out there at the upper end of your budget to buy. When I get this way, my wife is quick to remind me of the "big picture".
  • lemmerlemmer Member Posts: 2,689
    You might hasten that death if you cheap out too much and drive an old car with outdated safety engineering and features.

    For a lot of people, the difference between a car that costs $150 a month and one that costs $500 a month is largely irrelevant.

    By the way, I plan to live a reasonably fancy-schmancy life now and still semi-retire at 55. It can be done.
  • lemkolemko Member Posts: 15,261
    ...but not "ha-ha" funny. I'm 40 and an old high school classmate of mine contracted cancer, beat it, and then got it again. He went out and got a new BMW Z4 while he still could drive. As far as I know, he beat it again or it is in remission. You never know when the end is coming. If I knew I only had a short time to live, I'd buy a new Cadillac ASAP. My life insurance and other funds would easily cover the cost of the car and everything else.
  • lemmerlemmer Member Posts: 2,689
    I don't know about you guys, but I don't really have any hobbies other than cars, so I figure my hobby and transportation budget should be added together.

    When I see how much my friends spend on hunting gear (requires a camper or cabin, about 50 different guns including a few pistols and a four-wheeler) or fishing supplies (requires a boat, a nice 4WD full-size truck to pull it, about 50 different rods and reels, usually even a lake house), I feel pretty good about buying and selling my cars far more often than necessary.
  • kyfdxkyfdx Moderator Posts: 235,221
    so I figure my hobby and transportation budget should be added together.


    This is the reasoning that I always try to use..

    But, then she brings up the NFL tickets, etc, etc, etc..

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  • jlawrence01jlawrence01 Member Posts: 1,757
    she brings up the NFL tickets, etc, etc, etc..

    But aren't you glad you held onto the tickets (g) ...
  • kyfdxkyfdx Moderator Posts: 235,221
    Yeah.... Finally, after 16 years...

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  • bobstbobst Member Posts: 1,776
    I don't see how you broke even, exbo.

    Your loan cost you 3.6%. The interest gained from a 2% money market account is taxable, so it really gives you about 1.4%.

    Therefore, borrowing the money cost you 3.6% - 1.4% = 2.2%
  • exb0exb0 Member Posts: 539
    Hello Bobst, are you enjoying nice snowy day in Washington? The government is open though, isn’t?

    The interest gained from a 2% money market account is taxable, so it really gives you about 1.4%.

    Ok, I am busted; I would have been a few hundred off if I continued to earn only 2% in my money market account. However, money markets are paying 3.5% now, so I am would have been better off financing.

    Don’t get me wrong, I am not against paying cash. I paid cash before, and paid off the loan in one lump sum before, but the interest rate spread between what I am paying and what I am earning has to be significant to justify that.

    Besides, money market is a bad example for a four year investment. At that time my broker hooked me up with a four year muni bond yielding 3% (no tax consequences there). He also offered me a foreign bank CD paying 5.25%, at the time when American banks where paying 2%. There are many safe investments out there that are paying a decent return; unfortunately you need a good full service broker to find them.

    Like I said before, if the spread between what I am paying and earning is less than 50%, and interest rates are rising, I prefer to finance and lock into lower rate.
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