Did you recently take on (or consider) a loan of 84 months or longer on a car purchase?
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Percentage of monthly income spent on a car?
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Terry, one of the pros here, never recommends buying new, always buy 2-3 year used.
Whereas the spread was obviously bigger for you on your vehicle, making slightly used more sensible.
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.
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
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).
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
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.
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.
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
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
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2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
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.
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.
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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).
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
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.
Bingo.!
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.
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.
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
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.
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
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.
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.
"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
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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
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.
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
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.
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.
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).
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
And if you don't have to worry about that you are living way below your means.
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.
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.
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.
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.
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.
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
But lots of folks do .......
Terry.
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.
This is a myth devised by little/low HP car owners to feel better about themselves. :-)))
<J/K, LOL>