Percentage of monthly income spent on a car?

beanboy

Up to this point, it has been Want Advertiser specials, Now with a decent income coming in, I can turn my head to new cars. Any rough guidlines as to what one should spend as a % of income?

I do plan on financing, and this will be my first time jumping into the realm of getting a loan (outside of school) and would like to get to know the system. Anybody recommend some good resources to learn about the process?

Any other comments about taking the plunge on a high-ticket item for a newbie greatly appreciated...

-beanboy

lancerfixer

The actual amount is up to what you're comfortable spending, but the figure I've heard bandied about (and seems to be a good guideline) is your monthly payment should equal about 20% of your monthly income.

seqlady

At the risk of sounding like your mother, keep in mind that those % are what a lender will LEND you; huge difference between what that and what you're comfortable with...unless you want to be car poor, house poor, or whatever poor....my advice is not to get into any deep debt. Keep the loan as short as possible (no more than 4 years) and you'll quickly build up a good credit rating. Life is alot more fun when you have some extra cash at the end of the month.

andre1969

don't forget things like insurance, fuel, maintenance, etc. You're going to have to pay them, no matter what kind of car you get, but they will still vary from car to car. I remember my first year in college, I was paying about $800 a year or so for liability-only insurance. I looked at some new and newer used cars, but when I saw what it would do to the insurance, I said forget it! (I was only 18-19 at the time though, so of course it's going to be more) I remember that my insurance on a 1989 Ford Probe 4-cyl would have been about $3200 a year. I also looked at a couple Monte Carlo SS's, around '85-87, and it would've been the same...$3200.

Now, I'm pushing 31, and going from an old clunker to a new Intrepid only bumped the premium from about $250 a year to $560 a year (good driving record, multiple policy, low risk area, etc)

Lancerfixer,
does that 20% count total car expenses, or just the monthly car note? If it's just the car note, I need to go out and buy myself a more expensive car ;-)

-Andre

timadams

beanboy, We had a discussion about this in another thread a while back. One of the numbers thrown around was that you should probably buy a car that costs 1/3 of your annual income...certainly no more than 1/2. Again, simply a rule of thumb that you can follow or ignore at your whim, but don't forget to think about insurance, gasoline, registration, service, tire and battery replacement, etc.

lancer: I would hope at least that your 20% example is based on after-tax (take-home) pay, not gross income! If so, that's probably a fair number if you include insurance, registration and other auto costs in the calculation.

wilcox

If a single person, then opt for at least 20% of net income.

If a homeowner, then opt for about 15%, depending on family and other commitments.

I recommend that a person save up a substantial amount prior to purchase of a car. It is always nice to be one step ahead of consumer debt.

This is an unpopular notion with most... because most new car buyers are borrowing from the "other guy". In the short-term, this is the easy way. They are making someone else rich, they are being driven by the smell of a new car rather than the sound of reason.

If you save your windfall, then before you know it you'll have enough for a shiney new vehicle and you'll avoid the debt trap. Hard to do, but you'll feel better about yourself for doing it.

Another tactic to save money is to buy a nearly new vehicle. Let the other person take the initial 2 year depreciation hit. Many smart shopper use this method. My brother, who has a PhD, swears by it.

I know this discussion wasn't suppose to be about saving money...so I yeild to the next "Smart Shopper"....and remember..."HOW much can you afford to pay each month..?".

im_brentwood

Insurance?

Ugh... dont remind me. Wife just totalled her RX300 in the rain yesterday... dammit...

There go the rates... Had the thing like 2 months to replace her last car which she also totalled!

ARRRRGGGGHH!

"No problem Mr Weismann, your adjusted rate is now $850 per month" I can just see it coming!

Bill

andre1969

Sorry to hear about your wife's accident. I hope she's okay.

I've actually been very lucky when it's come to accidents. I've rear-ended four people in my lifetime, but none of them ever reported it, as the damage was either minimal or nonexistent. The first time was when I was 19, two times were in the rain, and one time a lady slammed on her brakes on purpose. She was in a long line of cars that were running a red light around Christmastime, and I decided that enough was enough, so I pulled out into the intersection, cutting off a Mercedes that was about to run the light behind her. Well, I turned my head to make sure he wasn't going to hit me, and when I looked back, this lady stopped her car about 100 feet behind the car in front of her, and I bumped her. The first thing out of my mouth was "are you all right?" The first thing out of her mouth was "You just can't let anybody out, can you?" and then she drove off. So that pretty much told me that she was being a !

I have had two cars get totaled by others, though, but thankfully, no bodily harm.

Somehow, over the years, I've been lucky enough and kept my record clean enough, that I'm only paying something like $560 a year for the Intrepid on insurance. I have a multi-car policy + my condo, so that probably helps, too. I know this 19 year old kid who, between his car payment on a stripper Saturn, and insurance, is shelling out $550 a month! But, at least he has the smell of a brand new car!! Well, he's a delivery driver like me, so he has the smell of a brand new car and pepperoni!

-Andre

gpvs

Depends on a lot of variables. How much monthly take home do you get? How much is your house mortgage/rent? Groceries and food? How much of your income are you planning of saving? Then decide how much of a car can you afford. I think a roof and food are more important than transportation.

leomort

you're suppose to put down at least 20% of cars purchase price, finance no longer than 4 years, and no more than 20% of your net monthly pay.

Leo

fladriver

http://www.fool.com/car/Buyingacar.htm?ref=PFinAg

audia8q

20% of the purchase price down and payments no longer than 3 years. If you can't do this on the car you want, your probably can not afford the car. You also will stay at or around the depreciation rate which would allow you to get out of the contract without taking a bath at most any point.

The only thing that would change my thinking would be if a very special finance rate is offered...example. Mazda is offering up to 48 months at 0% financing on some models. In this case finance 100% and any extra you can get at the longest term offered.

Rich

98monte_ls

If you go by Rich's last comment...then I shouldn't even by driving my '98 Monte! I bought it at SmartBuy 48mo w/1k + trade down. Anything shorter and the payments would be to high. But I've had no trouble making payments and can still afford insurance & stuff for it.

I get the lowest insurance rates (clean record, age 35). On the car I want to buy, I have to look at the longest financing I can - like 72mo - otherwise the payments get too high. Is this foolish? Yeah I know its a Chevrolet. But I'm thinking, I want a car I will "enjoy" driving for all that time. The way I see it, if i keep the car full-term, then I'll own it. How much will a 6 yr old Camaro w/70K miles be worth? Well, my last trade was a 5yr old Sunbird w/87K mi and they gave me 3500 trade. So a Camaro's gotta be what, 3 - 4K trade at least? Maybe a bit more privately. So, then I'll have at least 3K right there for my NEXT car plus whatever I can save in 6 years.

Is this the wrong way to look at it?

bruce

timadams

I agree with Rich. If at all possible, you should pay a car off in 3 years. That way, you are never upside down in case the car gets stolen, crashed or you simply tire of it. Also, if you pay it off in 3 years and keep it another 2 - and (this is crucial) save the payments you had been making in a money market fund - you now have a wad to put down on the next car.

maryg2

My goal was keeping my payments affordable over the past 25 years, and they are still under $300 each month. I always get 48 month loans and keep the car 4-6 years. Because Accords have such great resale value, I can usually get a new car and have my payments be only slightly higher than they were for my last car. In other words, for between $100 and $300 per month over the past 25 years, I have always driven a car less than five years old. Since I was single most of those years, reliability and resale value were my main concerns. This time I sold a 96 Accord LX for $11,000 and for another $12,000 purchased an EX-6 for $23,000. If I hadn't hung around Edmunds for a few months, I never would have gotten the good deal on the Accord.

audia8q

If every customer financed cars in a smart aggressive way my finance department would go broke...haha. But it would take alot of people down a few pegs in make/model and consumers prefer to be upside down until the very last of those 60 and 66 month payments are made and drive a more fashionable car. I see so many people who just bury themself so far for way to long to be anything short of financial insanity. People who should know better. In the last 2 days I appraised 3 potential trade-ins that totalled $22,000 up-sidedown.

Rich

timadams

rich:>>In the last 2 days I appraised 3 potential trade-ins that totalled $22,000 up-sidedown. <<

Astounding! As someone who is careful with money, that figure just floors me. On average, then, those three cars were $7,000+ upsidedown each. With the coming recession and a near-universal lack of money management skills, I can only imagine bankruptcies are about to go through the roof.

BTW, did those "buyers" roll over that debt into new cars, extending their happy motoring?

audia8q

All three will be getting out the can of wax and keep making payments...Of course all wanted to lower their payments, had a max of $1000 down and were true payment buyers. If I could have offered them 84 month financing I suspect all three would have new cars today.

Rich

leomort

wow! with your suggestions, I'd have to rethink my car purchase. Here,I thought 4 years was good!
Any opinions/advice regarding get a used car?

Leo

98monte_ls

Just curious, what is the average monthly payment that people pay for their cars? (if there is such a thing)?

Is $300 considered a high payment on a $18K car?

audia8q

My plan is nothing more than a suggestion that would keep the consumer out of financial harms way giving them the opportunity to bail out of the contract at anytime without much pain....Many consumers think i'm nuts but its hard to debate purdent financial responsibility...But many people feel riskier than I am.

Nothing wrong with a used car...just remember everyone drives a used car!!! Those of us in the biz rarely buy new, we know better. But I also fully understand how good that new car smell is.

Rich

leomort

Rich,

Another question for you. When using your quidelines, it would be unlikely I'd be able to buy the car I'd want new. I was looking at Subaru Forester L which I'd be able to afford on a 4 year payment plan. Unfortunately, Subaru doesn't run those special financing deals like other manufacturers. But if I were to go used, say a 2 year old Subaru, I'd be able to move up to the Forester S model with a three year payment.
I typical try to keep my cars 7-8 years and avergage 25,000 miles/year. I'm concerned/worried about buying a used car that's already going to have about 24,000 miles on it given the mileage I'm going to rack on my cars. Do I have a legitimate concern or just being paranoid?
My other choice would be selecting a cheaper newer car with special financing deals. In particular, the Mazda Protege which offer 0% financing for 4 years. Since I keep my cars longer than average and rack up some many miles, resale value is going to be as important.
Which would be a better choice all things considered? Which is the better car all things considered?

Thanks for the help.
Leo

raybear

Subaru does run financing deals. I'm showing 6.9 for 48 months.

audia8q

Im not the one to ask financial advise,
I've never done a prudent financial thing in my life. haha

I personally would buy a 3 year old higher line type car that has great long term durability and a MFG. brand extended warranty. I always choose comfort/driveability over sensability. I'm just not afraid of used cars...but 0% financing makes most anything attractive. Our mazda store has been posting tremendous sales due to the special financing...You have a valid concern about the miles on a used car, but also most dealers have the ability to look up that cars warranty history. Bad ones are usually bad from the get-go and can be easily weeded out. If you going to put on 150-175K miles 25k extra wont matter on a good quality car...

rich

raybear

Rich may know if it's worth it. We bought a used minivan and checked out the dealer's story before finalizing the deal. He didn't lie about the car and we bought it for a fair price.

maryg2

Always, always check out the VIN number on Carfax. I almost bought a car the dealer said was repossessed. It was actually bought at auction from Budget Rent-a-Car. Carfax is the best investment you'll make if you are considering a used car.

audia8q

I like them...they sometimes get the mileage part wrong due to inaccurate reporting but info like flood/frame, etc. is pretty good. But not perfect since some state MVD essentially allow "washing" of frame/rebuilt/canadian etc titles.

We use carfax on all our trade ins. It has picked up a few title issues that potentially saveds us alot of money...

But nothing beats a good looking over by a trusted professional.

Rich

CarMan@Edmunds

Leo, Subaru does have special finance rates on the 2001 Forester. Through the end of April, I believe that they are providing 3.9% financing for 24 month, 5.9% for 36 and 48 month, and 6.9% for 60 month terms. These rates aren't nearly as low as the 0.0% rates that Mazda has available on many models, but they will certainly save you a few dollars over the unsupported rates that you would be able to get through a bank right now.

Car_Man
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im_brentwood

With the recent rate drops...

If your score is over 720, most dealers can now buy money for about 7%...

Means we can often beat credit union/online banks.

Bill

leomort

because I seem to remember two banks I looked into offering 7% interest on a new car loan, think both were for 4 years. On 2year or newer used cars they offered 8.99% financing. There was a catch though. You had to a member of their bank and have the loan automatically deducted from your check account.Otherwise you got hit with another 0.5%. Given what I could get at the local banks, Subarus' loan didnt seem that great. I guess if your cars sell without special deals/incentives why bother offering them? Perhaps Subaru will make deals on the Forester when the new 2003 model change Forester comes out?
Of course, I'll have to wait to find out. They're still nice cars

Leo

CarMan@Edmunds

Those of you who are trying to decide how much money to spend on a new or used vehicle really should check out the new vehicle affordability calculator that we introduced here at Edmunds.com. By anomously entering a few pieces of data, such as your monthly income, housing costs, etc... you can easily find out approximately how expensive a vehicle you can afford. Please feel free to use the following link to go to that section of this site: Edmunds.com Affordability Calculator.

Car_Man
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leomort

Is there a way to plug in what you want your monthly payments to be for certain loan length?

Leo

gnl

That "affordability" index is outrageous! When I put in my true income, it said I can afford a car payment that's half again as large as my mortgage! But my take home income is almost exactly half of my pre-tax income, due to deductions for taxes, pensions, health insurance, Social Security, etc. When I put in my take-home income, it came out with a figure that I thought was reasonable, and is in fact close to the figure I'm currently saving to buy my next car. (I make car payments to myself and pay cash.) I think anyone using that index as given needs to take the results with a very, very large grain of salt.

justfind6

I also tried using the affordabilty index, and it tells me I can afford a vehicle with a purchase price of $212,846.
That's almost what I paid for my house.
I'd want to be making at least $1 million a year before I'd spend that much on a car.
Maybe the calculator needs some work.
Or maybe I should just go buy that Bentley...

roninjouten

If one is an aprtment dweller with monthly payments of say the norm in San Diego for a one bedroom $1k and makes $2k a month, then a $400 payment is a serious drain on the cash reserves. But if he's pulling down 4k a month, $800 doesn't really hurt at all. Everybody needs about the same cash to live, so the extra dough makes it gravy.

mmcbride1

But the more cash you have, the more cash you spend. While the guy pulling in $4k can afford the $800, it will still seem tight - trust me.

gnl

one of the funniest posts I've ever read! The disposable society has now created a disposable car! PLEASE tell us you're kidding, right?

lovethosesuvs

Here's my issue: paying more than a quarter to a third of my home's value on a depreciating asset.

That's what makes the cute-ute class so attractive to me. A lot of bang for the buck--space, a V-6 in my case, not as hard on gas, and a payment that will leave you with a little extra for other things, like investments with good yields.

morningglorie

When I was buying my first car, many, many years ago, I read some financial planning article that said most people can afford a car that's total price (not the monthly payments) is one-quarter to one-third of their gross income. Keep it closer to one-quarter if you've got kids, other debts to pay off, big mortgage and so on. Go to one-third if you've got adequate savings, no debt, mortgage payments no more than 1/4 of your income. Those ratios still make sense to me all these years later.

xfactor

The Affordability Calculator falls short but has been programmed within the accepted industry practice. The industry practice of calculating what someone should/could spend is a joke and should never be relied on.

All the points here discuss % of income. Why not a % of net worth excluding home.

I believe that is what post #41 is getting at.

morningglorie

No, I really meant percentage of income, not net worth. So if you have an income of $60,000, you could easily afford a car costing 15 to 20k. (total price). Income of $90K would mean a car costing up to 30k. A less-conservative buyer, or someone who is positive their income will go up in coming years, could possibly stretch further, depending on other commitments.

Your net worth really wouldn't enter into it, especially if you're like most people and most of your net worth comes from your house and your retirement plan. Because cars depreciate, obviously you wouldn't want to cash in stock, which hopefully is appreciating - or will eventually, pray God, after this last year! For most people (unless you're living off your trust fund, or were smart enough to trade in your tech stocks at their high) car payments or savings for a car come from cash flow, not appreciation of other assets, so that's why you would want to think in terms of percentage of income, not percentage of net worth.

gnl

Anybody else here read Warren Brown's column in the Washington Post? He had a good one today about auto manufacturers are making fewer and fewer low-end cars, and pointed out that the average new car today costs $22,000. The median household income in the U.S. is something like $39,000, but avg. individual income is around $27,000. He wondered who is going to be buying all these new $30,000 plus cars. He's got a good point. Used to be not that difficult to pick up decent transportation for relatively small bucks, but not anymore. And thus, people get themselves into trouble financially due to lack of viable options.

fladriver

A company that builds a certain car had better be sure the car will sell for more than it cost to make.

The Korean brands are selling more cars these days while the Big 3 are selling less, and I'm sure sticker shock has a lot to do with it.

As to who will buy the $30k cars, the car companies have their target markets identified before a car goes into production. Once it's in production, if they figure the demand is going to be less they can build less of it and still keep the prices up. For ex, BMW supposedly makes twice the average industri profit on each car sold, but then they're not out to put a BMW in every driveway. They know their audience though.

michaellno

I think the issue is that many folks are not "buying" so much as "leasing" those $30K vehicles.

BMW built over 1,000,000 cars last year. In Europe, they compete against VW (low end 3 series with 4-cyl engines) as well as MB and other luxury manufacturers on the high-end. Plus, they've got the rights to the new Mini (coming soon to only 90 BMW dealers around the country) - $18K to start.

I see the logic in the 25-33% of net income argument, I just think that most folks want to drive a bigger/faster/sportier/more luxurious car than what they can get for $15-20K.

xfactor

The reality is many people buy used cars.

fangio2

comes from spending more then you can afford.Not profound,Iknow.People go into a dealership and blow smoke up the salesman's er rump.The salesman wants to sell as much as he can ,so he goes along.
If you can afford $400 a month -spend $300 you will be happy with your car.My wife wanted a new car,I figured a Camry or Accord for around $20.000 was what she needed.She drives about 100 mile a week(a cab would be cheaper,but--).Instead,I found something cheaper-she likes the car,I like the car.Now,if the same car cost me over $20,000 I wouldnt like it so much.

drew911

Interesting topic. I have friends who, relative to their income, have spent ridiculously small or large amounts of money for their car. Oddly, the ones making the least spend the most, both in absolute dollars and relative to their income.

Personally, I would feel uncomfortable spending more than 15% of our monthly take home pay on a car payment. My current car payment is 5.5% of our monthly take home pay, and I hope to never go above 10%. My younger sister, against my advice, is spending 25% of her take home pay on a new car (Acura TL-S), the same car she was SOOOO excited about beforehand and doesn't even keep clean now. IMO, 25% definitely is too high.

gnl

Spending 25% of your take-home income I agree is way too high. When I earlier referred to cars costing 1/4 to 1/3 of your income, I meant, for instance, a $20,000 car for a person making $60,000. How much of a bite that would be in terms of car payments depends on the length of the loan, but typically it would be around 10-15% or so of your take home income if the loan were around 3 years, and you put some money down.

It's sad that people get so in hock for cars that they forgo other things in life, but we each make our own choices.

xfactor

How about 10% of Income + 10% of Cash Savings.

Income 60,000 * 10% = 6,000
Savings 60,000 * 10% = 6,000
Car cost 12,000 (Means Used)

Or

Income 60,000 * 10% = 6,000
Consumer debt -9,000 * 10% =-3,000
Car Cost 3,000

Income of 60,000 sounds nice but really is not an indication of anything.

kinley

The person with a six year old Crown Victoria or the person with a three year old Towncar? Answer: Crown Victoria he bought three years ago. Both vehicles seat 6, have 4.6 V8, same tranny, tires, & driveline, plus many other similarities. The CV owner will pay with saved up cash, is self employed, and knows it is not so much what you earn, but what it expenses out to own. He is frugal, wise, and will retire with a healthy income.

cfg1

Don't happen to own a CV, do you?