Percentage of monthly income spent on a car?

fdthird

Have a friend who went to buy her first new car in 11 years. Smitten with a Ford Escape and I guess dazzeled by the new car and the dealer financing dance. Signed all the papers and took delivery of the car...only then did she really sit down with a paper and pencil and figured that after all her expenses (mortgage, insurance, car payments, etc) she'd have $100 left at the end of the month. That's $100 for food, gas, and all the other little "out of pocket" items!

Wasn't long before she was at the local credit union looking to re-finance the Escape!

Do the math first!!

ghulet

obviously there are lots of variables in the 'how much to spend' question.
I think a good rule (one I now live by) is to either have 'paid for' car that you put money into for repairs, or have payments and little maintenance expense. Almost never a good idea (financially anyway) to have a car that you are paying both a big payment and substantial upkeep costs. Like, if you can afford a $17k car, you're probably going to do better on a new Civic than you would on a 96 Acura. Just my $.02.

mnowak1

I was told that running your credit alot can drain your credit score. I have deceided that I want to purchase a new car by the end of the year. I was told that my credit score is very good, but my residence and work history is short. I would like some advice on how to find a reasonable rate on a car loan without lowering my credit score.

I am also looking into buying a 2001 Honda Civic EX Coupe - Automatic, but I am not sure on what a good price is since this car is pretty popular. (Will a dealership work with me on a good price) Need some advice...

CarMan@Edmunds

Mnowak1, although many credit inquiries will have a negative effect upon your credit rating, generally speaking a number of inquiries over a short period of time are not really that bad. My advice to you is to get pre-approved to finance the Honda Civic that you are interested in by your main bank, credit union, or even one of the several on-line banks that are out there like peoplefirst.com. Getting pre-approved to finance the car that you are interested in will give you a good idea of what sort of interest rate you can expect to get. Not only that, but if you go into the dealership that you purchase your Civic at already approved at a certain rate, the F & I guy there will be motivated to beat it.

As far as the price for this car goes, The Edmunds.com True Market Value for a 2001 Honda Civic EX Coupe with an automatic transmission is currently $16,172. This is only slightly over this car's Dealer Invoice, so as you can see there are certainly deals to be had on this model if you live in an area that has some competition for your business and do some comparison shopping.

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mnowak1

Thanks for the advice!

CarMan@Edmunds

You're welcome, mnowak1. Don't hesitate to ask if you think of any other questions.

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mnowak1

I requested an online quote from a local dealer, and his response was...

He has the exact vehicle I requested, a 2001 Civic EX 2-door Coupe with auto trans in the colors black, red, or green. His price including the options I wanted (half nose mask/carpet floormats/rear spoiler is $16,980 plus TT&L. I think I would like maybe $500.00 less. Is this a fair deal on the first offer.

CarMan@Edmunds

Mnowak1, the price that you were quoted for this 2001 Honda Civic ES Coupe w/automatic transmission is about $980 over dealer invoice. So you are essentially getting this car for about $1,000 over minus the cost of the spoiler, mask, and mats. I certainly think that this is a reasonable price if you don't have the time to or just don't feel like shopping around. However, I don't see why you wouldn't be able to bet this price by a couple of hundred dollars if you are willing to do some leg work.

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mnowak1

I feel that you are right about the leg work. As popular as this car seems to be and all the dealerships here, I beleive that I could proably get a better price by taking that quote and having some other dealership beat it by atleast $500 which is what I want. Or possibly the dealership that quoted me would offer $500 less too. The only problem is....is that I am not completely ready to buy just yet. I only have about $800 saved up. Now I am stuck between...I could get a car in about 1 month from now and have around $1400 saved up to put down or I could wait unitl Nov. when I will have around $2000 to put down. And what about financing...I have tried two seperate places to apply 1. My credit union 2.Honda dealership, both places said I require a co-signer. I expected that much I guess only having credit for about 1 1/2 years and not long history. Also another question is if you put down an amount how do you calculate that into the price...before TT&L or after. Thanks for all your help.

audia8q

if its going to take you 2 months to save up an extra $400 you might consider a less expensive car.

mnowak1

Why is that? Im not putting all of my money aside only about $300.00 a month or so. I have only just been starting to save up since July this year.

im_brentwood

Well,

I think what AudiA8Q is saying, and I agree, is that you ought to consider all of your ownership costs here.

Figure you finance the car at, say, 8%. Say you get it for $16,500 and your out the door is roughly $17,690 with taxes and reg (I'm assuming 6% tax).

That's a payment of roughly $315 or thereabouts a month for 60 months with $1,700 or so down...

Then ya gotta figure in insurance, which, if you're younger can be high (I'm a 26yr old single male who just got popped for 95 in a 65 (i know.. I know.. but it was at 3pm on a sunday and nobody was on the road..) so I know about paying for insurance!))

I think we're saying that ya need to look at your total budget...

Bill

mmcbride1

You were in the XJR, weren't you?

mnowak1

Thanks for the advice everyone....I appreciate it very much.

According to Edmunds.com you should take you 20% of your take home pay and thats what you can afford? (right) Well if this is true then I should be able to afford around $340.00 a month for a car payment. Which I think is a little more than it would be if I got my car. So I am in the clear for other things that might come up. I have thought this out with all my bills etc. and I should beable to afford this no problem.

I just dont understand, I guess that the amount of money you save up should matter what you can afford. Or something like that Or maybe I dont get it and you guys are right.

Your right Bill my insurance will be around $200 a month unitl Nov then it will drop to about $100

im_brentwood

That guideline that they use is a good one I think.

That's as high as I would go personally. Have you checked esurance.com? They are pretty good although I bet they get PO'd at me when they find out about my latest speedy gonzales antics... =O

Good luck with the Civic, theyre great cars with great resale.

Bill
PS.. Mmc.. was an 00 CLK430 Cab.. top down too! Damn those Black and Tan Fords that hide in the bushes... grrrrr

mmcbride1

Oh, you have to drive the worst cars! I'm surprised that you haven't invested in a V1 yet.

mnowak1

Thanks Bill! Yeah I know what you mean about resale value....I just got finished paying off my 1st car and its not even worth trading it in, thats why I like to Honda line so much (RESALE value) It really does make a difference!

gnl

20% of your take-home pay seems high to me, unless you have absolutely no other debt and have your "rainy day" fund of about 6 times your take home salary tucked away somewhere. If you already have a paid-off car, assuming it still runs and is not about to fall apart on you, why not keep that for another year, build up your savings, get to the point that your insurance costs would go down somewhat, and be able to buy it on your own next year without a co-signer?

I know, I know, very conservative of me!

godeacs

20% of take home is too big. Based on that formula I'd be paying $500+/month and no way would my conservative budget (ie I don't waste my $$$) allow that. Unless of course I didn't want to put anything towards savings, insurance, mortgage, gas, food, etc! Heck, a car payment of $300/month would scare me to death.....

qbrozen

with rent/mortgage, electricity prices where they are, gas prices where they are, etc., etc., I also think 20% is extreme. Between my wife and I and our 2 car payments, we spend about 12% of our take home. And that is ALOT. I consider them to be BIG payments and HATE making them (although I love the vehicles - its a rocky relationship). Good luck!

mnowak1

Yeah, I know what you mean about conservative...Im the same way. I hardly ever buy anything I dont really need. I guess I dont like the car I have now, I have been waiting 5yrs for this thing was paid off, all I have had is little problems here and there since I've got it, and it just really makes me mad when I can finally get some good use out of it and trade it in on something...and its not worth anything. About waiting for another year, its easier said than done. The best thing for me to do is what you said...wait a year and save up. I guess Im lucky by the sounds of it, Im glad I dont have a mortgage yet.

im_brentwood

mmc: If I DONT use a radar detector and I keep my little gold FOP badge with me I can get out of 90% of my tickets...

If I have a radar detector I am screwed...

Speaking of cars remind me to tell you the story of the $115 Volvo 240 I just bought

mnowak: Yup! Hondas have great resale value. I consistently see clean, Silver, low-mile 5-year old Civic LX sedans do $7,500+ at the auction, so you know they're being retailed for close to $10K. So what did these things sell for new? $14K?

Smart move to buy that car.

Good luck with it!

As far as 20%.. I think it depends on a lot of factors. I think it should be used as a Maximum, but what if you make like $100,000 a year? And you take home like $6,000 a month? Does that mean that a $1,200 car payment is a wise move? ($55,000 financed over 60 mos).

I dont think so myself! But, at the average-lowish ends of the income spectrum.. its ok I think. I mean, Lets' face it, unless you put a huge chunk down.. most any nice new car is gonna cost $300 a month these days..

Bill

mmcbride1

Tell me the story in the other topic.

As for the 20%, I guess I could spend 20% (and I did on my first car out of college, but since then I have doubled my income and lowered my lease payment), but I think that's just too much. I think I'm at about 12% (just lease payment, no gas or insurance), and I'd like to lower that even a little more, but it's not bad at all.

michaellno

I think we're around 13% of take home pay for two lease payments (again, before gas, insurance). Even factoring those in, we're under 18% of our take home pay.

mnowak1

Is it better to purchase options (nose masks, rims etc.)to be factory installed from the dealership, or from outside sources. Are option prices negotiable at the dealership?

im_brentwood

You mean dealer-installed accessories?

Well, the advantage to buying them from the dealership is that they can generally be financed in with the deal.

The disadvantage is that they are often quite expensive.

There's a honda website out there (Check the Honda topics) where you can buy Genuine Honda accessories on the cheap. Certainly worth looking into.

Bill

mnowak1

Thanks once again for the advice. I think the hardest thing to find for cheap are the Honda SI rims that I want.

im_brentwood

Looked on eBay? I recently picked up a set of SUPER rare wheels there....15" BMW "bottlecap" alloys made in the early '80s...

Bill

mnowak1

I have looked on ebay...I have found that most of the si rims come out to about $450-500 (without shipping costs) Would it be cheaper to purchase them direct from the dealership or just get them from ebay? I dont really know how much the dealership charges. I am thinking of getting the rims after I buy the car, instead of financing them. Well that is of course if I dont get a good deal on them at the dealership. Any suggestions out there...

im_brentwood

Well...

I don't think that they will retail at a dealership for less than $500 or so.

Alloys tend to be expensiveish...

Have you tried aaarims.com? They are in Michigan and quite competitive...

Bill

mnowak1

Thanks for the info. I will try them out.

mnowak1

mnowak1

I went to aaarims.com and I found the si rims. If I get the set of 4 it will cost me $620.00 plus a discount for buying them in sets of 4
-$100.00 Grand total of $520.00 plus $12.50per rim shipping...total walkout price $570.00...not bad! Do you know of any other places that I could look?

thanks a bunch, mnowak1

im_brentwood

Hmm.. they're usually who I deal with...

I recently had to buy 2 Highlander rims. They had em.

I dunno.. maybe might try se4arching the net but they are generally the cheapest..

Bill

tomccoy1

If you don't know what percentage of income you should be paying for a car, you shouldn't be buying one.

You need to get a budget for all your living expenses - it will give you an accurate picture of how much you can afford to be spending on a car.

A popular car like the Camry costs $5,000 to $6,000 annually to operate, including monthly loan payments, your cost of capital on down payment, insurance, gas & service, and miscellaneous. Probably a reasonable amount for a family with income of $40,000 to $80,000.

thel

Not including insurance, and property tax. What sounds like a responsible % of gross monthly income to spend for a monthly payment?

audia8q

I don't know about the percentage of income...but I have followed the theory that if you put little or no money down then 36 month financing is the max one should go to keep up with depreciation. If there is special financing like 0% then take the longest term possible.

but overall if you 'NEED' to finance a car for 60 months or more you probably can not afford the car. We are currently seeing alot of 72 month financing and I am amazed. oh well, its not my money.

tboner

of course we bought 1/3 of the house the bank says we can afford, so we can buy too much car, LOL

TB

thel

is that I say someplace (perhaps Edmunds?) that recommended not spending more than 10% of your gross monthly income for car payments. For someone making $30,000 a year that comes out to about $250 per month which doesn't sound very high. I was simply wondering if there was sort of a general rule of thumb that people (or banks/lenders) use when giving financial advice.

jlawrence01

Last week I saw an ad in the Chicago Tribune:

2003 Chevrolet Cavalier $99 per month

Small print: $5k down, 96 months, 10.99APR

Financing an econobox OVER 8 YEARS!! OUCH !!!

Personally, I do not believe in car payments. Drive a beater until you can afford to pay cash for a better car.

When you go to a dealership knowing that a new car will set you back $22k and you have to write out a check for THAT much, all of a sudden, that used car deal that you passed up doesn't look all that bad.

leadfoot4

in car payments, or money spent on "upgrades" for the car??

lemko

...in a bad part of town? I see these kinds of ads for dealerships in seedier neighborhoods all the time. These guys should be ashamed of themselves. I'd rather drive a $400 beater than be subject to that kind of deal!

masspector

I agree with what you said 100%. I have always been told to not go over 48 months. Personally I finance for 60 months, so the payment is reasonable in case I have a bad month and can only afford the monthly payment. But I always either pay extra per month or make extra payments with a goal of not paying for more than 48 months. I think most people would be hard pressed to pay for any car in 36 months.

I have a question, and it is not intended as a slam on you or the other salesmen. Do you or your salesmen tell buyers that "if you 'NEED' to finance a car for 60 months or more you probably can not afford the car"? I have seen the opposite effect at most dealerships, with the saleman doing anything to get someone in a new car, whether they can afford it or not. If I were at your dealership and you were that candid with me, I for one would be grateful that you were looking out for my interests as a customer.

zueslewis

of my income. This is the first car payment I've had in 4 years. Weird.

tboner

I went and figured out that my car payments were only about 11% of my gross income, and a wee bit more than my house payment, LOL

It's the 36K miles I drive each year that drive up the total transportation cost number. Yes across the three vehicles I drove 36K and wifey another 8K.

And yes all vehicles will be paid off in 36-48 months.

TB

audia8q

oddly enough telling certain ego driven customers they can not afford the car will guarantee the sale!! It is our job to sell the car and benefits of owning the car and benefits of the dealership... it's risky waters to tell a customer what they can and cant afford. Usually this will end up with the customer leaving and going to the next same brand dealer and buy the same car. The bank will turn down the financing if the numbers are way off base, then its the bank saying he can't afford the car not some car dealer.

Back in the 80's when 48 month and 60 month financing become more and more of the norm it was dealers who were pushing the longer terms to make the payments more affordable. With the 72 month terms I am seeing more and more consumers asking for the 72 month term. As a dealer the last thing I want is a customer who is going to be out of the market for 5-6 years. Many consumers who finance for 48-60 months are trading in the 38-42 month range...72 month buyers have paid so little towards the principal at the 40 months that they cant get out without a huge payment increase, lots of cash down, cheaper car or a longer term.... and the cycle starts again.

zueslewis

I make good money and I've been pretty thrifty over the last few years.

We I signed up, the guy had already put in a 72 month term - on financing $16,500!! I asked, "Are you on drugs?". His reply was that most people want the smallest payment possible, and being former F&I, I understand it.

I went with a 48 month term where the payment was only $48 more per month.

cds12

I'm 30 years old, but I'm old school. I pay cash for my vehicles. A great lesson I learned from my parents.

rubicon52

Not sure what median household income currently is, but 45k seems right. If so, 10% of income would work out to $375 mo which sounds reasonable.
Hmmmm. Maybe I should take on a car payment and get something nice.

Don't think the car dealer has any obligation to prevent a customer from getting in over his head financially. The risk on a car note is assumed by the buyer and the lending institution. Frankly, anyone who makes a big financial mistake on anything as simple as a car payment is probably doomed anyway.

masspector

thanks for the reply...nice to learn from your insight....these longer terms are ridiculous, especially as quickly as most cars depreciate

rubicon...I agree, but it happens everyday...gotta keep up with the jones' you know...

im_brentwood

I don't get these really long-term deals.. I mean, it's stupid.

But then, I generally am not a fan of buying a car new anyways. $22K for a new Camry versus a 2 year old Saab or a 1999 BMW 528i? etc?

Ummm...