Car payment vs income=8% is ideal

[Ripsnort]

CAUTION: COPY AND PASTED ARTICLE
.
.
.
.
.
.
.
.
.
.
.

How much car can you really afford?
Your monthly payment is just one factor to consider.

NEW YORK (CNN/Money) - Maybe you need a car. Maybe you've found a car you really love. But whatever you do, don't compromise your financial health to buy it.

Financial planners often tell clients they have car loan payments that are too high given their incomes and goals. And clients often say, "Oh, but I got such a great deal."

Well, there seem to be lots of great deals in these incentive-soaked days.

But your best deal on a car is one you can truly afford. And that means keeping an eye on your budget while considering your monthly payment, the term of your loan, the interest rate and the total cost of owning the car over five years.

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

PRUDENT RULE OF THUMB

Your monthly car payment shouldn't exceed 8% of your monthly gross income. Less if you have other debt.

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.

Here's why: When you buy a house, mortgage lenders ideally don't like to see more than 36 percent of your monthly gross income devoted to your total monthly debt payments; of that, they don't wantmore than 28 percent going toward housing. That leaves you with 8 percent for your car loan. Less if you have other debts.

So if you make $5,000 monthly -- that's $60,000 a year -- your car payment shouldn't exceed $400. If you have a $100 credit-card or student-loan payment every month, then your car payment shouldn't exceed $300.

Second, mind the term
Of course, you may be able to ratchet your payment-to-income ratio down to 8 percent by doing what a lot of car buyers do: take out a long-term loan.

According to the Federal Reserve, as of September, the average loan term was 63.2 months (5 years, 3 months), up from 52 months (4 years, 4 months) in 1998.

It used to be the 36-month loan was the most common. Then, in the mid-1990s, it was 60 months. Now, the majority of lenders will offer loans up to 72 months, said Nicholas Stanutz, head of the Consumer Banker Association's auto finance committee. That's six years of car payments. And a handful, he said, will even offer loans up to 84 months or -- hit the brakes, Bertha -- 96 months. That's right. An eight-year loan.

Meanwhile, Americans tend to change cars every three years or so, Stanutz said.

Realize the longer your loan term, the greater the chances that you'll be "upside down" -- which is to say you'll owe more on your car than it's worth by the time you're ready to sell it or trade it in.

Cooper's advice?

"Figure out the payment you can afford on a 36-month loan," he said.

Here's why: In the race between the declining value of your car and the amount of you still owe on it, you're likely to lose during the first three years of a long loan. The car will lose value faster than your monthly payments can pay down principal and interest. That's particularly the case if, like a lot of consumers, you've only made a 5 percent down payment on your car instead of the once-traditional 10 to 15 percent.

Those nice incentives -- rebates or zero-interest financing -- also accelerate depreciation. For a number of reasons, incentives can drive down the resale value of a car.

And even if you plan to keep the car a long time, life may dictate otherwise. What if you need a bigger car thanks to a new baby? Then you might be left with an upside-down trade-in.

"That's a bad position to be in," said Phil Reed, consumer advice editor for Edmunds.com. The best strategy, he said, is to pay off a loan in three years and drive your car for seven.

Third, mind the rate
If you're considering buying a car that's offering incentives -- say a 0-percent loan or cash back -- do the math. You actually may be better off paying for the car in cash, taking the cash-back incentive and then financing the car with a loan from a bank that offers a better interest rate than the standard dealer rate.

If you're buying a popular model that isn't offering incentives, shop around for the best interest rates before negotiating with the dealer.

The last thing you want is to agree to a loan because the monthly payments seem affordable, but the interest rate is higher than what you could get elsewhere.

Fourth, mind the future
Lastly, don't be swayed by low sticker prices. Price isn't everything.

You must consider the cost of ownership over five years to figure out what a car will really cost, Reed said.

Remember, in addition to your monthly loan payments, you'll be paying for insurance, fuel, maintenance and repairs and you'll be absorbing the cost of depreciation.

That's why sometimes less-expensive cars can actually cost more over time than a car with a higher sticker price.

Compare, for instance, the Honda Civic LX four-door sedan, priced at $16,155, and the Hyundai Elantra GLS, which costs $14,101. Say you're making a 15 percent down payment and taking out a 60-month loan at 5.76 percent. According to automotive data provider Intellichoice, the Honda will cost $3,116 less to own after a five-year period than the Hyundai because it doesn't depreciate as quickly, and its insurance, fuel and maintenance costs are less.

To find out a car's cost of ownership, use Edmunds.com's True Cost to Own calculator or Intellichoice's Side-by-side Comparison.

Better yet,save your money (or invest it), then pay cash, and skip the interest rates

[Raubvogel]

Or buy a $800 POS and drive it till it collapses

[Ripsnort]

Originally posted by Raubvogel
Or buy a $800 POS and drive it till it collapses

Yep! Thats what I did for the first 20 years I was on the road.

[FUNKED1]

You drove a vehicle on the verge of collapse for 20 years?  That's not very safe.

[FUNKED1]

That article is not exactly written for an enthusiast.  It's apparently for people who treat a car as a commodity.  Some of us value driving more than others, so more than 8% is ideal.

[LePaul]

Yea those are nice suggestions...I just dont make $60k a year...less than half that.

Numbers, schnumbers....best advice, live within your means.  I'm loan free and hoping the car makes it a few more months  

[gofaster]

Just for kicks, I ran a little exercise.

Ford Focus = $18,000 retail, more or less
Monthly payments = $847 (@ 24 months, 6.5% tax, 5.75% interest, no down, no trade-in).

Monthly income to make that $847 be only 8% of gross monthly income = $10,600 a month.  Annual income would have to be $127,200.00!

[Ripsnort]

Originally posted by gofaster
Just for kicks, I ran a little exercise.

Ford Focus = $18,000 retail, more or less
Monthly payments = $847 (@ 24 months, 6.5% tax, 5.75% interest, no down, no trade-in).

Monthly income to make that $847 be only 8% of gross monthly income = $10,600 a month.  Annual income would have to be $127,200.00!

I've never met anyone that had a 2 year car loan. Most in the U.S. are minimum of 4 years, usually 6 year loans,  and upward to 10 year loans in some cases. I've heard that in Europe, a 10 year car loan is standard, can any of our Europeans comment on this?

[Chairboy]

Originally posted by gofaster
Just for kicks, I ran a little exercise.

Ford Focus = $18,000 retail, more or less
Monthly payments = $847 (@ 24 months, 6.5% tax, 5.75% interest, no down, no trade-in).

Monthly income to make that $847 be only 8% of gross monthly income = $10,600 a month.  Annual income would have to be $127,200.00!

Who buys a new car on a 24 month plan?  My wife and I only buy cars that are a couple years old, and we usually use 24 month plans for that, but everyone I know who (unwisely) buys new, they usually do 4, 6, or even 7 year loans.

[Gixer]

Interesting article, even more interesting that car loans can be taken out for such long periods in some countries. Cripes over 10 years I could of bought a new jeep instead of a second hand one.


...-Gixer
~Hells Angels~

[airguard]

Originally posted by Ripsnort
I've never met anyone that had a 2 year car loan. Most in the U.S. are minimum of 4 years, usually 6 year loans,  and upward to 10 year loans in some cases. I've heard that in Europe, a 10 year car loan is standard, can any of our Europeans comment on this?

Well i never buy cars above my 15000$ limit and usually want 50 % in cash when doing that.( have to save up, and nope i dont need a brand new car used for 2 years is good enough for me hehe.)
That gives me about 7500 in loan and i never use more than 2 years on those loans cause they are expencive. (aprox 335 $ a month for 2 years effective intrest is 8,548%)

that is in Norway.

but now i have to drive my car down, all the way since im a student again rofl

[lazs2]

i find it hard to believe that anyone making 127k a year would want a Ford focus.

lazs

[Bodhi]

I say buy within your means, use someone else's money and pay it off before it matures, 4 -8 extra pay'ts a year, and you are set.

[eskimo2]

In 95 I bought my 86 Volvo for $800.00  Its a POS now but still runs well.
A few months ago I just upgraded to a 89 Volvo because I wanted a sunroof, leather, CD player, electric windows and shiney paint.  I spent a whopping $1,400.00 on this one.  I'll be happy if it lasts 1/2 as long as my old one.

eskimo

[SlapShot]

Originally posted by lazs2
i find it hard to believe that anyone making 127k a year would want a Ford focus.

lazs

 

You kill me ... tears are running down my cheeks.