Comments on: How Much Should You Spend on a Car?

By: Car Dealer Columbia

Car Dealer Columbia — Thu, 30 Jun 2011 16:44:46 +0000

I think it depends on how much you research a car, the reliability factors, and of course, money situations. For some it’s a matter of finding the right used models and for others it’s the bright, shiny new auto that gets them going. I do agree with the 10% of total income expense for a car, because every shopper could find a very good car with that model of payment.

By: Jacob

Jacob — Fri, 24 Jun 2011 14:21:50 +0000

I agree with this. The front/back ratios are based on what reports to your credit, not what you spend. In the mortgage industry they do not take into account utilities. CR number is similar that is does not take into account insurance or gas. As a general rule of thumb (assuming it isn’t your first purchase) 3X salary is what you can afford for a house (although you can qualify up to 4X if you have very low debt) and 1X salary for car purchase. The idea being that you would have equity from either a previous home sale or car sale. My income is around 130K (household) both my wife’s and my care are paid off. If we use the 1X rule for car purchase at 1/2 household that leaves 65K purchase price, 25K in down payment from equity leaves 40K to finance. Over 5 years @5% is about 750/month; which is very close to CR’s 13.6%. If properly taken care of and you don’t drive 100K miles in a week your car when paid off should have equity of about ½ the original purchase price (32.5K in our case).
I don’t recommend this thought… Pay cash and drive it until it is dead… Getting the car fixed will usually always be cheaper than car payments.

By: bismils

bismils — Tue, 29 Mar 2011 00:07:56 +0000

Thank You. This was really helpful for me.

By: John

John — Thu, 06 Jan 2011 20:30:55 +0000

@ “Annoymous”

Lol I like your troll. The sad part is that some people will think you’re serious. I wasn’t too sure myself until I saw your name.

Well played, sir.

By: Annoymous

Annoymous — Fri, 31 Dec 2010 06:00:13 +0000

I just purchased a new BMW M3! I had to do it since owner of the company got an used 335xi! I always had a thing about being better then the owner of the company in terms of affuence and all. It a 120 employee company and I work in the warehouse as a stocker. It kind of an entry level postion. But he was shock when I showed him my car! He said “how can you afford the M3″? I just smiled; since his BMW is three years old and my is brand new! $90K

I had to deal with the financing of it; but it was worth it! I pay about 75% of my take home pay for monthly payment on the M3 and had to extend it to 72 months instead of the usual 48 month time frame. Insurance is super high too since I am only 19 years old!

By: RJ

RJ — Sat, 27 Nov 2010 21:54:48 +0000

Actually I agree with you Stephanie. Most car dealers aren’t sleazy, some are, but most aren’t. Regardless of the sleaze factor, they will all sell you as much car as you will take and that the bank is willing to finance for you. John C is obviously in the car business. Take a short term unless you are planning on driving that car to the grave. If you finance a car for 72 months and trade it in 3 years, say hello negative equity. The best plan is to buy a new car on a promo rate of 0% 1.9% even 2.9%. Put about 20% of the total cost down, and finance it for no more than 5 years, 4 if you can swing the payment. That will put you in a good position equity wise, and if you decide to keep it for a long time, you will be driving payment free after 5 years with (on average) 70K miles on your car, most cars today if properly maintained will go well over 200k. Thats about 7-8 years of free driving. Good Luck All.

By: Jon

Jon — Thu, 19 Aug 2010 19:32:37 +0000

As a car fanatic and a life long cheapskate, I have always struggled with how much to spend on a car. So, here is my take on the topic of how much to spend on a car – the car vs house calculator

The general principle is that the annual cost of your car versus the annual cost of your house should be proportionate to the amount of time you spend in each.

Take a look:
http://www.befrugal.com/tools/how-much-to-spend-on-a-car/

By: richard a

richard a — Sat, 03 Jul 2010 23:45:01 +0000

Learn how to shop for a car. Learn how to maintain a car beyond just watching the fluid levels and the idiot lights. shop for a used car from a private seller rather than dealers. Save your own money every month just as if you were finacing it,then buy it on cash four years later. You’ll save money on registraion and insurance because your car’s paid for. By the way this goes for the ladies too.

By: Anonymous

Anonymous — Mon, 18 Jan 2010 19:09:06 +0000

I guess the problem might be that those “experts” make just a little too much for their own good. I know I certainly do, but (you knew that was coming) I haven’t always had as much, and it is incredibly unrealistic to assume that everyone is wealthy. After all, if we all had a great deal of money, there would be no need for car loans at all!

Anyway, keep in mind that Consumer Reports says 36% of gross for DEBT payments. I wouldn’t consider utilities on the house or gas for the car ‘debt’ (unless you put them on a credit card that is…). I of course agree with you that everybody should look at their own numbers, but then again, what do rules of thumb exist for but for basic reference to get you in the right general neighborhood? If you make $1,000,000 a year, your acceptable level of debt may be a much higher percentage than somebody making $30,000 per year. Also, I think it would be wise to not wish that everybody could run their own numbers, because if they could, who exactly do you think would be reading this?!

Also, I find it very unrealistic that everyone uses gross income as a basis for estimation. I personally use net for all of my expenses and I think that if you use the 36% rule applied to net income, most people will not have too much trouble. For example, if you made $30,000 per year take home, you could (according to CR) use $10,800 per year towards debt. This leaves you with $19,200 per year for food, clothes, gas, utilities, savings, recreation, and health purposes. Since the average American (I’m assuming you’re single in this example) spends less than $6000 per year on food (source is a U.S. census, I can provide a link if you want) this leaves about $13,200 per year for those other things. If you say $700 per year for clothes, $500 recreation, and $2000 for health, you are left with around $10,000 for gas, utilities, insurance, savings, and other miscellaneous things. That $10,800 would get you a fair apartment (here in Austin, TX, a one bed one bath apartment in a nice, central part of town will run you about $650 a month for a two year contract) and a bit left over for a used car. I think this is perfectly reasonable so long as you are single and don’t have particularly high end tastes. I’ll shut up now, and sorry for writing such long comments, I just find this topic one of particular interest.

By: Stephanie

Stephanie — Mon, 18 Jan 2010 02:11:11 +0000

Thanks for your comments! While I agree with you that the numbers make more sense your way, every “expert” I’ve seen seems to use them the other way – 1/10th of your annual salary for the price of the car you should buy, or the Consumer Reports idea of using no more than 36% of your gross salary for debt payments. But I do agree with you – neither of those metrics provides enough leeway for most Americans to afford a decent car, which leaves them particularly useless rules of thumb. I’d rather people run the numbers and look at their individual finances than rely on these bunk heuristics.