YACT --debt to income ratio?

[Syrch]

Im going to be in the market for a new car soon and yeah i'd love a 07 Tahoe or a 5 series BMW but im curious what the income ratio is to what you should spend on your vehicle.

For an example if someone makes 50k a year how much should they ideally spend on a vehicle?

Please /discuss

 

[dullard]

Ideally, they should just write a check for the vehicle and drive off. Then all the interest they save by not having a loan will pay for their next car! Rinse and repeat. All your vehicles are free from your savings.

However, I realize that few people will ever have the ability to withhold their vehicle purchase long enough to set up that plan. Therefore questions like yours pop up. The next best thing is to never, ever get a car loan for longer than 3 years. If you can't afford to pay off the 3-year loan, then you can't afford the car.

If, for example, you can only afford your 2007 Tahoe on a 4-year loan, then you shouldn't get it. Just put the money you would spend on that car into savings for one year. Then next year, get a 2008 Tahoe on a 3-year loan and use that savings account as a bigger downpayment. Heck, by then you'll be glad you have the latest model and not some crappy 2007 version.

 

[Syrch]

Originally posted by: dullard
Ideally, they should just write a check for the vehicle and drive off. Then all the interest they save by not having a loan will pay for their next car! Rinse and repeat. All your vehicles are free from your savings.

However, I realize that few people will ever have the ability to withhold their vehicle purchase long enough to set up that plan. Therefore questions like yours pop up. The next best thing is to never, ever get a car loan for longer than 3 years. If you can't afford to pay off the 3-year loan, then you can't afford the car.

If, for example, you can only afford your 2007 Tahoe on a 4-year loan, then you shouldn't get it. Just put the money you would spend on that car into savings for one year. Then next year, get a 2008 Tahoe on a 3-year loan and use that savings account as a bigger downpayment. Heck, by then you'll be glad you have the latest model and not some crappy 2007 version.

Hmm thats a good point. I just wasn't sure if there was a ratio for this, like you make 50k before taxes you should be able to buy a 25k vehicle.

 

[dullard]

Originally posted by: Syrch
Hmm thats a good point. I just wasn't sure if there was a ratio for this, like you make 50k before taxes you should be able to buy a 25k vehicle.

I suppose someone could create a ratio like that. However, the ratio would be vague and there are just far too many variables. Do you have an expensive house or not, do you have expensive habits or not, does your significant other blow all the money or not, etc.

Also, income ratios ignore wealth. Are you fabulously wealthy but have little income? If so, you can afford a car worth far more than someone who has a moderate income but who is in debt to their eyeballs. Thus, ratios are only applicable to people with average spending habits. The rest of the people could be highly mislead by a ratio.

The 3-year loan idea that I posted above avoids all of those variables. It is applicable to each and every person in the world. Go to a payment estimator for the vehicle you want. If the 3-year loan estimate is too expensive for you to fit in you own personal budget, then wait a bit for the car or get a cheaper car.

 

[iamwiz82]

Originally posted by: dullard
Ideally, they should just write a check for the vehicle and drive off. Then all the interest they save by not having a loan will pay for their next car! Rinse and repeat. All your vehicles are free from your savings.

However, I realize that few people will ever have the ability to withhold their vehicle purchase long enough to set up that plan. Therefore questions like yours pop up. The next best thing is to never, ever get a car loan for longer than 3 years. If you can't afford to pay off the 3-year loan, then you can't afford the car.

If, for example, you can only afford your 2007 Tahoe on a 4-year loan, then you shouldn't get it. Just put the money you would spend on that car into savings for one year. Then next year, get a 2008 Tahoe on a 3-year loan and use that savings account as a bigger downpayment. Heck, by then you'll be glad you have the latest model and not some crappy 2007 version.

Unless there is a 0% offer. If that were the case, I'd extend the payments, as long as you have the self control to invest the difference between a 3 year and 5 year loan. May as well have your money work for you.

Note: I didn't say if it's 0% get a more expensive vehicle.

 

[TravisT]

My first car I bought from a dealer at the age of 18 and it was the biggest financial mistake I've made thus far. I hate working with dealers now. I made the mistake of going in there saying "look, i'm not willing to pay more than this" giving them the max I would pay. They also put the car on a 6 year loan. I have been driving an alternate vehicle to keep the mileage down so that by the time I get this loan paid off in another year or so it won't be quite as bad of a deal. I paid way to much for the vehicle and didn't look at the paperwork good enough before driving off the lot.

I think 3 year loan is ideal as was mentioned above. I think it also depends on how many miles you intend on driving. Just look at how many miles you drive per year, then run the loan. You don't want to wear out the vehicle before you get it paid off and you should probably want quite a bit of breathing room. Plus you should still want to be able to drive it for a couple of years after being paid off before you are due for another vehicle.

I will likely never work with a dealership again. I would rather work with an individual wanting to sell their vehicle if I buy a used car again.

 

[dullard]

Originally posted by: iamwiz82
Unless there is a 0% offer. If that were the case, I'd extend the payments, as long as you have the self control to invest the difference between a 3 year and 5 year loan. May as well have your money work for you.

Note: I didn't say if it's 0% get a more expensive vehicle.

There are exceptions to every rule. I'm sure I could find a sucker to give a much better loan rate for a 4-year loan than a 3-year loan. But for the vast majority of vehicle purchases, the 3-year loan will be the better loan. Same goes with the rare 0% exception - it can be good, but it is rare and it may have problems.

Many times the 0% loan means you forego any incentives on the vehicles. And thus, you might pay far more total to get a 0% loan. Also, many 0% loans recently had fine print which is devistatingly painful. Things like it is a 0% loan for a set period of time, but it reverts to a 20% loan, with interest retroactive, and you can't pay it off early.

But, assuming you found a genuine 0% loan, without losing incentives, and without any fine print, then go ahead and get that loan for as long as you can afford the mark on your credit score. But, even then, the 3-year loan rule is a good guideline for vehicle afforability. Find which vehicle you can afford, then get it on 0% loan if possible and for as long as you want.

 

[Gunslinger08]

I purchased a $30,000 car on a 4 year loan with a good interest rate. My payments work out to around $700 a month. A Tahoe or 5 Series is going to be significantly more than that, if you buy new and don't get a 6 year loan (which I recommend not doing).

If you have minimal other bills, a $30,000 vehicle is do-able on $50k a year. If you're paying for rent/mortgage and utilities and other bills, don't do it. Buy something used for $15k or below.

 

[SuperNaruto]

realistically, i make enuff and i drive a 30k car..

I'm pretty sure a 5 series is way over 30k

 

[GuitarDaddy]

Everyones situation varies too much to have a good general rule based on income. For example a single person living in a modest apartment making $50 in a low cost of living area will be able to afford more car than a mid forties married guy with 4 kids and a house in the suburbs making $50k.

My general rule is, if you can make the payments without hampering your lifestyle or eliminating your ability to save, then your good to go.

 

[mugs]

If I were getting a 5 year loan (which is typical now), I'd shoot for a car payment that is 10% or less of my monthly take-home income.
If I were getting a 3 or 4 year loan I'd be willing to go higher on that percentage.
If I were getting a 6 year or longer loan... I'd be crazy.

 

[LS20]

GENERALLY, half of your salary (before tax)
good practice is 4/10th of salary.

 

[Syrch]

This is all very good information and i appreciate the input. Let me give you a little background and let you guys throw in your opinion. Right now im driving a F150 with the 4.6L V8 (very happy i don't have the 5.4 or above as i see my dads gas bill or atleast what it used to be). Like most with a vehicle like this they got a little weary when gas prices were nearing the $4 mark as filling up was costing more than $70 a week/$280 a month. Every month when i saw that i figured at that amount of money I could get another car. I do plan on keeping my F150 as its great to have a pickup truck for times that I will be needing it, and yes i do use it for what its meant for often. The loan on the truck will be up in about a year so im starting to do my homework on vehicles now.

Now this is where I want to stop myself from being stupid. I have the luxury of my company paying for my rent for the next few years. I will be putting what I save into my savings and want to use that towards a house. Now my truck payment is a little over 400 a month. With both rent and my current vehicle paid off I will be able to save quite a bit of a nest egg and my monthly income to debt ratio will be much different than most (not bragging just saying, again i feel very fortunate).

With this extra monthly spending money I could easily get stupid and buy a 5 series BMW or a 60k expedition but I really feel that would be stupid. This is why i was trying to see if there was a basic formula thats used for the "general" public...

 

[Vic]

DTI = monthly payment / gross income

However, you should NEVER shop for a car on the basis of monthly payment. Too many variables there other than the price, too many ways for the dealer to cheat you (i.e. by putting you in a 7 year loan for example).

 

[LS20]

with an existing car loan there is no way i would consider going into another LOAN for a car. especially in the 5-series price range, even if i had made, for example, 150k. im in the same situation about having 1 car, and considering a dd/commuter. id go for a cheap utility beater like a 3000$ civic hatchback.

 

[Mermaidman]

I believe the ratio for housing is no more than 1/3 of your gross monthly income. I would imagine the ratio for a car payment is much less than 1/3. Assuming the ratio is half that for a house (i.e. 1/6), and your $50K salary, that would mean financing $25K for an auto over 3 years. On top of that $25K, you can include the value your truck, which should have good resale value.

Of course, being that you're single and childless, you can live for the present and splurge :evil: I do believe in spending money on what's important to YOU. So if you like motoring, don't feel bad in apportioning more money there, but cutting back elsewhere.

 

[Syrch]

Yeah i wont' be getting another until my current is paid off and i want to lease so i dont' have to worry about anything with the vehicle, im sure i will have worries with my truck. I would idealy like to make it so my car payment and gas payments are = or less than my current truck payment. Which obviously puts the 5 series out the window.

 

[PricklyPete]

Originally posted by: LS20
GENERALLY, half of your salary (before tax)
good practice is 4/10th of salary.

Good lord almighty...I hope you are kidding...

 

[mrzed]

Originally posted by: PricklyPete

Originally posted by: LS20
GENERALLY, half of your salary (before tax)
good practice is 4/10th of salary.

Good lord almighty...I hope you are kidding...

Brought to you by the fine folks at the Auto Financing Association of America.

Seriously though. Cars, like computers, are a depreciating asset. Doubly so for new cars. If you want a car for anything other than directly earning income (i.e. you are self-employed and drive to job sites with tools etc) then first come to terms with the fact you are getting an expensive toy (assuming anything more than the Civic beater mentioned above). Nothing wrong with that, but you should view it as an entertainment expense, because anything beyond the basics is just that.

Decide how long you want to be on the hook for payments, how much you want to pay, and weigh it against the opportunity cost of using the difference between that and a cheap car to do other things like invest, travel, get a nicer house, what have you.

What I am getting that is, cars are a discretionary expense, so use your discretion. Some people are happy to scrape everything they have to get an Escalade. Others (like me) are happy to spend cash equivalent to 2 months gross income on a very reliable used car with less than 60K miles on it. Neither one is correct, because I choose how to spend my money, just as the Escalade driver does.

You have to earn the money - you get to choose how to spend it.

 

[MixMasterTang]

Originally posted by: PricklyPete

Originally posted by: LS20
GENERALLY, half of your salary (before tax)
good practice is 4/10th of salary.

Good lord almighty...I hope you are kidding...

I think he is saying if you make $50,000 a year you should only buy a car that costs 4/10 of that or less (so in this case, a $20,000 or less car).

 

[spidey07]

I would recommend one that is 25% of your salary or less.

Or around 12,500 car for the case of 50K

 

[LS20]

Originally posted by: PricklyPete


Good lord almighty...I hope you are kidding...

take a lot at any standard neighborhood... should average american homes have 1980 Tercels instead of 2001 Taurus

should Middle upper class homes have 1990 Camrys instead of 2003 Yukons


a standard 60k engineer should be able to drive a 25k accord ex... unless you were on the opposite spectrum and thought my rule of thumb was even too stingy

 

[Tab]

Why not find a nice used BMW instead? You'd save a fortune and I am pretty sure you could find a certified pre-owned one that doesn't break the bank.

 

[Stunt]

I bought a 2002 Honda Civic Coupe with 40k mi and a 3 year warrenty for $14k last year.

I make $61k. Ratio = 1/4 for me.

Get a cheap reliable car; it is a liability and not worth the money.

 

[crystal]

Originally posted by: LS20

Originally posted by: PricklyPete


Good lord almighty...I hope you are kidding...

take a lot at any standard neighborhood... should average american homes have 1980 Tercels instead of 2001 Taurus

should Middle upper class homes have 1990 Camrys instead of 2003 Yukons


a standard 60k engineer should be able to drive a 25k accord ex... unless you were on the opposite spectrum and thought my rule of thumb was even too stingy

I think he misread what you mean (50% of the paycheck go to the monthly car payment), which I also do until mixmastertang points it out.