Percentage of monthly income spent on a car?

prodigalsun

Well, according to edmunds, the car will depreciate 3500 or so, which puts me at about 15, not 12. I never trade, I've sold 5 cars now, and don't find it too difficult to do. My interest rate is 4.75 for this car, so we're not talking a big difference in financing charges. The Maxima is the most reliable sedan according to consumer reports, so I don't anticipate the repair/maintenance to be to dramatic for the vehicle either.

Terry, one of the pros here, never recommends buying new, always buy 2-3 year used.

eharri3

For the vehicle I was interested in that would have best have netted me a 3 or maybe 4k discount over what I paid for my new truck. The sticker price on my truck is actually approximately the same as your Maxima when new. My truck listed for 29,930. But then you have to ask how far below that are you paying in each situation. I came out 5 grand below sticker. I doubt that's likely on a Max. Since this IS the wintery Northeast, used 1-3 year old Daks are going for asking price of high 19s up to 21 or 22. Big difference, spending 20-21K, or at the very best, maybe high 19s, for a vehicle I could get for 24 new, as opposed to spending 18K for one that goes for high 20s. The spread on my truck between the price of heavily discounted new and a couple years old used one wasn't big enough to be an incentive for me to accept less of a warranty, not knowing its history, and being 20-30 thousand miles and 2 years closer to needing new tires, brakes, etc...

Whereas the spread was obviously bigger for you on your vehicle, making slightly used more sensible.

audia8q

When I have a friend or relative ask the how much should I spend question....my answer is simple.
a minimum of 20% down and 36-42 month payments. If this is out of your range then you need to look at a lesser priced vehicle.

its a bit harsh, but it will keep the buyer in a near equity position. The negative equity problem is how a guy ends up with an escort for $600 per month after rolling in 4 past trades-ins.

Of course if everyone practiced financial prudence we would go out of business.

steine13

Right.
When I bought my '03 Sienna, I got their 0% financing. Limited to $20 even. So of course I went to the max and paid the rest in cash, $3,800 or so.

Both the salesperson and the F&I manager made remarks about how I put down "a lot more" than most people. It wasn't until I got home that I thought about it and realized that after 6% use tax and fees, the "down" was only 10%.

Apparently, that's considered "a lot". Ouch. So much for the 20% down recipe. Not that i disagree with the concept.

My CU is happy to write 4-year loans on 7-year-old BMWs. At book. Doesn't matter how I know :-)

-m

thel

that sounds like good advice...no for the discipline to acutally implement it!

stickguy

Actually, that's about what I do, although I usually put down a higher % (depending on the cost of the car and whether it is new/used).

FWIW, we are looking at new cars for my wife, and she might want to get a Highlander. In rough numbers, it will probably cost 20K + trade-in of a Quest (although might sell it retail). Add about 1,500 for tax/tags, put down $6,500, borrow 15K for 3 years (and pay off in 2), and never be near upside down. Plus, you end up with some real cheap years (no payments + under warranty).

ladyofluxury

I think the decision to buy a vehicle and how much to spend has so many factors involved that it is difficult to have a 'set' rule for anything. For instance paying 20% of net income in car payments for a family that has alot of other debt aside from housing (i.e. credit card payments, student loans etc.) is completely different than a family that has only a fixed cost of housing to be concerned with. I just think it's dependent upon the person and of course their level of risk.
 Also, it shouldn't really be about what vehicle you can afford but what amount you should finance. You can have two individuals making the same amount of money and one may have nothing to put down while another may have $10K to put down. Automatically the person with $10K to put down can afford a vehicle $10k more than a person with no downpayment and end up having the same monthly payments, considering they both have the same finance terms.

lemko

...does that include the value of your trade, (assuming the trade has been paid off) or is it 20% in addition to the value of your trade?

ghulet

....really has little importance in this equation. There are probably as many families in the U.S. who earn $100k a year with a $500 mortgage as there are with a $2000 mortgage. It's all about debt to income ratio.

lemko

A good debt to income ratio is no greater than 36% of your gross income.

corvette

The selling price of your car should be no more than half your annual income, the selling price of your house should be no more than twice your annual income. This formula is just a harebrained thing I thought up, it has no real basis.

stickguy

I would lean more toward 1/3 and 3X, although it differs as income goes up (a certain minimum is required for basics before you even have discretionary income), and where you live, particularly as it relates to housing costs.

Say you make 100K, and support a family on it. I think it would be nuts to get a 50K car, but 30-33K sounds reasonable. Same token, a 300K house (assuming you have a decent down payment), at todays interest rates, doesn't sound too scary.

Kirstie_H

You're not talking apples-to-apples assets here - one is depreciating from the moment it's purchased, and the other (unless you've made a big mistake) should appreciate. The calculation on how much of your income to spend is, then, totally different.

Personally, I believe you should own as much real estate as possible and as little vehicle as possible (within reason), but that's just me

kirstie_h
Roving Host & Future Vehicles Host

stickguy

true, but you still have to be able to handle the payments. It's quite possible to get in over your head on a mortgage too, not just a car loan.

rroyce10

..... **It's quite possible to get in over your head on a mortgage too, not just a car loan** ...

 
           Unfortunately, most are .... I see probably 200/300 credit reports a month, and it would amaze you how many people are only 2/3 months away from a bankruptcy, and income has nothing to do with it ~ $50,000 or $500,000 a year - pick your poison ..................

                         Terry.

Kirstie_H

Definitely true. Basic, sound personal financial management is always the first step to making other decisions. However, if you're in over your head on mortgage payments, you at least have an asset to sell - there's at least the possibility of recouping a majority (if not more) of your money.

With a car, well... it's doubly important to be aware of the risk given that you may own an asset that's worth significantly less than the purchase price the day after it's purchased.

The lack of good judgment in how much income is too much to spend on a vehicle is scary.

stickguy

Well, no guarantee that you would make enough profit selling your home shortly after you bought it to not take a loss (just the 6% realtor fee can eat you alive). If anything, you will be down less on a car, just because you can sell it for $.99 (sign at Walmart).

Most people tend to have a pretty significant chunk of equity in a house (DP, appreciation from prior homes), so yes you have positive equity.

At least when they repo your car the sheriff doesn't throw you out onto the street!

Seriously, I agree with your point, which I think is to live fiscally conservatively (aka below your (perceived) means).

janz

I recently spoke with a realtor regarding what our home might sell for. I was rather surprised to hear him say that how many people do have little or no equity in their home.

I have also read this in several articles. With all the low cost loans of the past couple years, and home prices in so many areas appreciating rapidly, a lot of people have refinanced and/or taken our 2nd mortgates. It is more common than you might think to be upside down in your home.

rroyce10

... **a lot of people have refinanced and/or taken our 2nd mortgates. It is more common than you might think to be upside down in your home** ...

                        Bingo.!

                              Terry.

jlawrence01

I agree with Terry.

Several things to remember:

1) Not every market in the US is like New York, Chicago, SoCal, NoCal, and certain other centers. There are a lot of markets where there is fairly slow growth (well under 2% in appreciation a year).

2) For the past 10 years, a lot of people have taken out 2nd mortgages, 3rd mortgages against any equity that they might have had.

3) Lines of credit - Many have financed a lot of depreciating assets (i.e. cars, boats, etc.) with mortgage debt.

A few years ago, I did some research on bankruptcy filings in Northen Illinois. All I have to say is that people would be surprised at the incomes that people filed BK Chapter 11 with.

Wait until the next adjustment in the housing market (think early '90s in Southern California) and you are gong to see some people in big trouble.

stickguy

I don't doubt that many people soemhow got upside down in their houses. gives me the willies just to think about it. Must be the Puritan heritage.

There is a fine line between living within your means (and having a nest egg to fall back on) and depriving yourself of any enjoyment (you can't take it with you). Not only do many people have trouble telling where the line is, they don't even bother to look for it.

asafonov

Another way to look at this is, of course, the cost per mile or per month, related to depreciation, insurance, cost of repairs and maintenance, etc. First, not everybody (though a large majority) takes out a loan to pay for a car. Also, since keeping a vehicle for 10 or 15 years is not always possible or desirable, it may be ok to pay more per month for a car which keeps its value better, than to pay less and be buried in the loan. Bottom line, I'd like to project that if I keep the car for a year, two, three, five, or ten, what my per mile and per month costs will be - for me, this is more meaningful than the loan service costs.

PS. I am NOT an accountant! (and it probably shows.)

PPS. No way a middle-income family (say, 50 to 150k/year depending on where you live) should use 1/2 of the annual income as a guide for a new car price.

asafonov

Ok, an imaginary example. The numbers are probably way off.

Buy a used 1-2 year old domestic or a non-Toyota/Honda Japanese import (I am thinking, Taurus, Impala, Century, Galant - rental fleet favorites.) Pay 10-12 k OTD.

Buy a new small Kia/Hyundai/Aveo. Pay about the same. Assume loan terms are about the same, so the loan costs are as well.

I am not in the car business, but a quick perusal of *asking* prices convinces me that the former will have a higher resale value than the latter two, three and five years down the road. Since few people literally hold on to their cars forever, statistically the former category buyers will have spent less money. Professionals' opinion and comments

corvette

>>> No way a middle-income family (say, 50 to 150k/year depending on where you live) should use 1/2 of the annual income as a guide for a new car price. <<<

My parents probably spend more on their cars (and other things) than they "should," but their house is paid for. They usually finance their cars but seldom trade before they're paid for.

I see tons of people with little or no equity in their homes, cars, or that plasma TV they put on their credit card last month... The system actually rewards this, if you are a senior citizen cancer patient paying $3000/month for prescriptions, you probably won't get any assistance until you have depleted your assets.

asafonov

I paid off house makes all the difference. They are probably way under the recommended 36% debt to loan ratio (recommended in the sense that lenders will have trouble giving one a loan if his/her ratio is above that.)

lemko

...varies from source to source. Some say 36% is good. Another source says it should be 20% or less. Some use gross income in the equation. I use a more realistic net income.

Geeze, if my house were paid off, I could live well on a WalMart income. Even then, my mortgage payment is modest compared to most.

I heard that 25% of monthly income toward a car is a realistic goal. I've got it at 15% net. By those standards I'm way ahead. The best rule of thumb is never to trade before the car is paid for. I kept my last car 8 years and paid it off in three. I had a lot to put down on my next ride and still managed to get a decent amount for my trade. This way you stay ahead of the game or at least break even.

clovisguy

"The average consumer pays 11 percent of his or her monthly gross income on a car payment, according to estimates from autos Web site Edmunds.com."

"Certified financial planner Chris Cooper thinks that's too high for most people. As a rule of thumb, he doesn't think it's prudent to pay more than 8 percent of your monthly gross income on a car payment. Less if you have other debt."

http://money.cnn.com/2003/10/21/pf/autos/q_spendtoomuch/index.htm

Kirstie_H

I'm not 100% sure what my gross income is, but I know that I agree with the CPA for my own personal circumstance - I'm at about 8% of net income. As stated previously, it can be a dangerous prospect, given that the car almost certainly will not hold value nor appreciate in value - the less you can spend and still be happy, the better.

steine13

I do not find these figures to be very helpful... a lot more has to go into the #s for each person.

For instance, what if you had a family of six to lug around? Sounds like you need a minivan. And I'd argue that the best deal in minivans is a low-end Sienna or Odyssey bought new, or at least it was until the redesigned models came out.

At that point, get the "LX" or the "CE", stretch the payment as far as you have to, and get GAP insurance (cheap) and an extended warranty (not cheap) to cover the life of the loan. You may be over the limit, but at least you've got the transportation needs covered. A Gd Caravan with all the incentives and $150 less per month may well come back to bite you.

It appears that a lot of people are figuring how much they can afford, than find a car to fit that payment... for those people, finding a percentage of income is probably helpful.

-Mathias

lemko

...I'm pretty close. I did the calculation and the payment comes to 8.8% of my gross monthly income. Of course I have no other debt besides my mortgage. Geeze, do financial analysts think we should all be driving stripper Kias?

stickguy

Is actually high, if you make a reasonably large salary. As with any figure, how much you make and where you live play a big part in it.

If you make 100K a year (a good salary obviously, but not exorbinant if you live in the NE where the COL is rediculous), 8% is $667/month, which is way more than I would be comfortable paying on that income.

For 50K income, it's about $330, which seems somewhat more reasonable, although it might actually hurt more.

lemko

...on how long you finance the vehicle. I finance for no longer than 36 months to avoid being upside down. In fact, my car note will be paid off at the end of next February. Eight percent for 36 months isn't as bad as 8%+ for 60 or more.

stickguy

although you can lease a pretty nice set of wheels for $650 a month!

ghulet

I know this is not the time nor place to get into the buy versus lease argument, but at $650 a month, there are PLENTY of nice cars available for purchase. I don't think I could justify a lease at that number.

Also, I don't understand the notion of figuring out how much car one can afford based on gross income; for a home, yes, since part is tax-deductible, but for a car, I'd use net income. Also, since I'm a bartender and work on a cash basis, 'gross' doesn't do me much good. I don't make a whole lot, but still, eight percent (of net) is pretty paltry. I don't think I could buy much of a new car for $256 (more or less) a month. Sorry, I'm nitpicking. I don't think it's nearly as simple as a flat percentage of income, you have to take credit, other obligations (debt, family needs, cost of living, savings goals, yada yada) into account. If I lived in southern Illinois instead of Chicago, I could probably drive something pretty fancy; it just costs so much to live here that spending much on a car is a bit foolish.

kmag

since thats what I have to live on.

When I was single and living in apartments and driving new or nearly new cars, I tried to live this way: X=1 weeks take home pay, rent=X, car payment around 1/2 X. This meant I didnt live in a fancy apartment and I drove modest cars but it gave me plenty of extra money to spend on dates, buy computer or stereo equipment, take trips, or save.

Now that I am married and own a home it works the same way - except I dont spend the money on myself of course. Together we take home about $950 a week and thats the max I feel comfortable spending on the total house payment - for me, mortgage, taxes and condo fee. Sure the banks will gladly loan us alot more but if we had bought the house they said we could afford, I can't see how we could live comfortably on what is left.

And 425/month has to be very close to the total of the two car payments. I have also found that I have to watch repair expenses when going with an older car, because these could easily be 1000 to 1500/year. When the repairs get to costing more than half of what a newer car payment would be, it starts to be not worth it for me.

I think the banks will loan you way too much money and this gets many people in trouble. Too many times in my life I have been a payment shopper, put no money down and rolled the tax plus 2-3000 of red ink from my trade into the loan, effectively financing %125 to %150 of the retail value. My wife has done the same thing even when she was only a year past filing bankruptcy. Now we both have good creit, it would be very easy for us to have traded in for two 20K car loans on 15,000 cars and at the same time run up the credit card and a home equity line of credit, or refinance 125% of the value of the condo and spend the 30K of cash we'd take from the closing. Then all it would take to bring the financial house of cards down is a hospital stay or a layoff or some other emergency.

stickguy

I personally like having car payments of 0% of gross income (or net if you prefer). Even if I do borrow to buy a new car, it will be less than 50% of the cost, and will get paid off early (no more than 2 years). That way, the average over time is way less than 8%, because in many years it is 0.

I also won't have 2 payments at the same time. Out circumstances (commutes/travel, etc.) don't require 2 new or fancy cars.

But, as some others have pointed out, housing costs (in this case a mortgage) make up for what I don't pay on cars. Just one more joy of living in the NE (NJ for me).

kmag

even if you pay cash you have to restock your savings. So essentially if you pay cash, you still have payments, but you are paying yourself, not a bank. If you dont do this you'll eventually run out of money.

And if you don't have to worry about that you are living way below your means.

lvboy1980

I don't know if the debt to income ratios differ for certain types of credit or parts of the country but I make a GROSS amount of 2400.00/Mo. and pay a total of 501.00/Mo on my lease on my own credit. I am 24/yo with 710 FICO and a few student loans but a lot of credit history. On the other hand, a friend of mine who already graduated makes approx 60k a year and has an $1050.00 payment on an 745i BMW. I guess the debt to income thing isnt always true.

manamal

25% of the gross income on a car seems high to me. But, that is my bias. Of course, when I was in Grad school, I was paying about 20% gross on a car, but I *knew* I would be earning more than 8K soon.

Currently, I pay 7% total of gross on two payments, the total of which is about your paymnet. Of course, I am also supporting a rug rat, wife, and dog.

jasmith52

IVBOY:

In my opinion your car payment is WAY out of line with your income. You should be driving a 10 year old toyota that you paid cash for with your income . Are your friends impressed ?

Here's a fun and very enlightening experiment for you. Take your $500 car payment and figure out the balance of a stock market mutual fund that gets inflation adjusted historic stock market returns (like maybe 9 percent). Figure out the balance when you are say 65 years old.

(Hint - I get more than $2 million - in inflation adjusted dollars )

So that's what your car payment really represents. That car is costing you more than you know !

Something to think about. Your freinds and neighbors aren't impressed with your car anyway and you are throwing away a great oportunity to set yourself up for a great retirement.

lemko

...reminds me of those commercials that aired a few years back. They had a faux commercial for an expensive watch showing an adventurer kayaking, skydiving, etc. The voiceover asks, "What would you do with such a watch? Well, you'd probably would just tell time! That $6,500 watch could cost you over $70,000 in investment opportunity..." Of course one could invest that $6,500 and lose it and not even have a Timex watch to show for it.

lvboy, your friend with the "Quarter to Eight" is nuts! He's spending over 40% of his take home pay on his car! Does he still live with his parents? My mortgage payment isn't as high as his car payment and I make more than he does.

kmag

If you gross 2400/mo you are making what I made in 1992. At that time I didnt want a RENT payment of 501 a month! I didnt want a car payment over 250.

A lease of 500 a month.....you must be leasing something really expensive. I think a lease is crazy, you are paying all that money and will take the car to the dealer when you are done and give it back to them - you could buy a 25K car for 500/month and after 5 years you'd at least own the car.

But really what can I say. In 1978 a buddy came back to town after moving away after high school, with a new Firebird, he worked full time and was paying 250 a month on it while making 6 an hour, 1040/month gross. At the time I envied him as I drove my dad's beaters to the local community college. Then in 1983 I was 24, making about 6/hr and had a $180 car payment + $1200/year insurance.....yeah me and Mike might have a small pile of money now if we had invested that money instead of buying cars, but someone's gotta feed the economy.

ghulet

I will never understand anyone willing to spend $1000 a month on a car. Someone his age would look silly (insecure?) enough driving a 3-series, let alone a ridiculously over-the-top 745. It's a bit much. Still, it could be worse, there are plenty of people who spend that much up their nose or boozing (been there, too), so who are we to decide? Still, in my now relatively old(er) age (35), if I had to do it over again, I think of the condos (or houses) I could have now had I an extra $1k a month to blow on a car when I was 24!

audia8q

You can't impress your friends in a lowly 3 series...you need the big dog 7 series.

 

lemko

...when I was 24, I purchased a new 1989 Cadillac Brougham. I only paid $393.00 a month for three years and I thought that was extravagant. I was doing extraordinarily well in the adverising business at the time and could easily afford it. However, the 1987 Chevrolet Caprice Classic I traded it for was in excellent shape and I still could've driven that car for at least another 5 years and saved the $393.00 a month and invested it. At least I still have the Brougham after all these years and it is still in excellent condition.

stickguy

Should have come here first the other day. Bought the wife a new minivan (the family travel mobile), so actually have a car loan for the first time in years. Went over my normal threshold of 300/mo., to a whopping $415.14. But, it's only for 3 years, and I expect it will be paid off in no more than 1.5.

 

And none of your business what % it is of monthly income ;->

 

Just leave it at I would get hives if I was spending 20% of my income on a car payment.

rroyce10

**Just leave it at I would get hives if I was spending 20% of my income on a car payment ...*

 

                But lots of folks do .......

 

                              Terry.

blueiedgod

I make a GROSS amount of 2400.00/Mo. and pay a total of 501.00/Mo on my lease on my own credit.

 

Wow, I am only a couple years older than you are. I gross more than twice, but still drive a Civic, and shift my own gears. Yes, I financed, pay $250/month. I am pretty comfortable with 5% of my income going to the car. At the time I bought the car it was at 6.5%, and I was not too comfortable with that. My mortgage, taxes, and other fees total 12% of my income. This leaves plenty of $$$ for other things.

 

I think Confucios once said: "If you fill the glass with sand you can not put any rocks in it, but if you fill the glass with rocks first, then you can put some sand in it, but have more rocks." I hope I don't have to explain what it means.

 

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.

 Besides, my philosophy on larger/high HP vehicles is that men buy them to compensate for their physical inadequacy.

eharri3

I pull in anywhere from 3200/month to 3600 depending on overtime and pay 388, and on my salary I think that is a PITA. I am far anough ahead in payments that I know for a fact I could have it gone within 48 months, but I'm shooting for 36. Couldn't imagine paying 501 on 2400/month. Unless I had some sort of passive income to supplement what I made from work, I could easily see myself eating Rahman noodles at the end of every month. My vehicle is a material object that is there for my enjoyment. It should be a slave to me, not the other way around. After this one is paid off it will be held until the piston makes its last move, and I will forever after be in a position where it's a choice between using my own cash or using a finance company's cash if they can make it a profitable enough deal for me.

mohatu

Besides, my philosophy on larger/high HP vehicles is that men buy them to compensate for their physical inadequacy.

 

This is a myth devised by little/low HP car owners to feel better about themselves. :-)))

 

<J/K, LOL>