WTF, I need to be on the Geo Metro board instead ...

well that was probably a bit extreme, but if the maximum amount of a person's monthly car payment should not exceed 8% of their monthly income MINUS any other debt payments with a 36 month loan puts me in the under-paid, over-hocked department



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.

[QUOTE=TeamZ4]well that was probably a bit extreme, but if the maximum amount of a person's monthly car payment should not exceed 8% of their monthly income MINUS any other debt payments with a 36 month loan puts me in the under-paid, over-hocked department
QUOTE]


That does seem overly conservative. Of course, you own a BMW, which has good resale. And the article is not speaking to people for whom cars are an obsession. If it's both your transportation and your hobby, you can justify spending a bit more on it.

And the article doesn't cover leasing, which I think makes a lot of sense for people who KNOW that they are going to change their cars every two-three years.

And the article also assumes that you are going to borrow the max available on a home loan. No one I know does that--they will lend you FAR more than most people are willing to devote to their house (partly because they want to spend more on other things, like cars). Obviously, it makes sense to put money into a house rather than a car, but some tradeoff there is natural.

Still, the article makes some good points. From a strictly financial standpoint, the advice is sound.

sounds like fair advice to me

Originally Posted by JST

That does seem overly conservative. Of course, you own a BMW, which has good resale. And the article is not speaking to people for whom cars are an obsession. If it's both your transportation and your hobby, you can justify spending a bit more on it.

Exactly!

For some, cars are just simple transportation. It's something to get from point A to point B. While others, cars are their passion. For people like us, the extra money is well worth it.

BTW, I just realized that I can't get a decent car (to me, anyway) with 8% of my income...

Do you behave like a millionaire?

Originally Posted by TeamZ4

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.

No where on earth am I going to find a worth family hauler for $78/month??

Originally Posted by ff

No where on earth am I going to find a worth family hauler for $78/month??

Originally Posted by tgravo2

Bull****.

While I'm all for people living within their means, all this does is shift money from a car payment to repair payments.

Given the choice of:

A) spending a theoretical $350/month on a Chevrolet Cavalier or Hyundai Sonata that's gonna self destruct after it's paid off/out of warranty

or

B) spending $600/month on a car that will actually have a resale value and almost no maintenance problems

Give me B every single time.

Maybe I'm being a little harsh on the American sled, but come on...Despite having a TEN YEAR warranty (Woo!) how many old Hyundai's (or any other "affordable" cars) do you see on the road? They start smoking after a year.

Originally Posted by LSB

Bull****.

While I'm all for people living within their means, all this does is shift money from a car payment to repair payments.

Given the choice of:

A) spending a theoretical $350/month on a Chevrolet Cavalier or Hyundai Sonata that's gonna self destruct after it's paid off/out of warranty

or

B) spending $600/month on a car that will actually have a resale value and almost no maintenance problems

Give me B every single time.

Maybe I'm being a little harsh on the American sled, but come on...Despite having a TEN YEAR warranty (Woo!) how many old Hyundai's (or any other "affordable" cars) do you see on the road? They start smoking after a year.

perhaps they're aren't that many old 10year warranty hyundais on the road yet. backing up something w/ a 10year warranty does require some improvements in quality unless they have planned to fold in the next while.

you're right about the americanos cars though.

Originally Posted by BlackChrome

Exactly!

For some, cars are just simple transportation. It's something to get from point A to point B. While others, cars are their passion. For people like us, the extra money is well worth it.

BTW, I just realized that I can't get a decent car (to me, anyway) with 8% of my income...

8% of my income is $1,200 a year.

Originally Posted by LSB

Maybe I'm being a little harsh on the American sled, but come on...Despite having a TEN YEAR warranty (Woo!) how many old Hyundai's (or any other "affordable" cars) do you see on the road? They start smoking after a year.

Hyundais are American?

Depending on youw you define "affordable," you can see a lot of them on the road. My sister's Accord was boring as all hell, but reliable.

Originally Posted by LSB

Bull****.

While I'm all for people living within their means, all this does is shift money from a car payment to repair payments.

Given the choice of:

A) spending a theoretical $350/month on a Chevrolet Cavalier or Hyundai Sonata that's gonna self destruct after it's paid off/out of warranty

or

B) spending $600/month on a car that will actually have a resale value and almost no maintenance problems

Give me B every single time.

Maybe I'm being a little harsh on the American sled, but come on...Despite having a TEN YEAR warranty (Woo!) how many old Hyundai's (or any other "affordable" cars) do you see on the road? They start smoking after a year.

I cannot fathom a $600/mo car payment. Hell, I cannot fathom $400/mo. That's just nuts, especially when you consider how much of that payment is non-deductible interest.

Originally Posted by TD

I cannot fathom a $600/mo car payment. Hell, I cannot fathom $400/mo. That's just nuts, especially when you consider how much of that payment is non-deductible interest.

Agreed. Whenever I can afford it, I prefer to buy anything outright. But financing is the only way for most to have any car at all.

Sometimes financing makes more sense financially, but I still would rather not do it. I don't know why, really. I just hate the feeling of being beholden to someone unnecessarily, I suppose. It casts a certain gloom over life.

Originally Posted by Plaz

Agreed. Whenever I can afford it, I prefer to buy anything outright. But financing is the only way for most to have any car at all.

Sometimes financing makes more sense financially, but I still would rather not do it. I don't know why, really. I just hate the feeling of being beholden to someone unnecessarily, I suppose. It casts a certain gloom over life.

i agree, unless they're are financial reasons like a business tax writeoff. but i don't have one of those

Originally Posted by TD

I cannot fathom a $600/mo car payment. Hell, I cannot fathom $400/mo. That's just nuts, especially when you consider how much of that payment is non-deductible interest.

A payment of only $600/mo? Man, that'd be sweet.

Payments have never bothered me. They certainly don't bother me as much as having an old car (read as, owning a vehicle for more than 24 months). Money comes in, money goes out. As long as the first category is substantially larger than the latter, I'm fine with it.

Originally Posted by Plaz

Agreed. Whenever I can afford it, I prefer to buy anything outright. But financing is the only way for most to have any car at all.

Sometimes financing makes more sense financially, but I still would rather not do it. I don't know why, really. I just hate the feeling of being beholden to someone unnecessarily, I suppose. It casts a certain gloom over life.

A-frigging-men. I own the 325 outright and am close to owning the Miata outright. It's liberating, I feel free to mess with the car - and I don't have to carry comprehensive.

i need a raise!

Originally Posted by Plaz

Agreed. Whenever I can afford it, I prefer to buy anything outright. But financing is the only way for most to have any car at all.

Sometimes financing makes more sense financially, but I still would rather not do it. I don't know why, really. I just hate the feeling of being beholden to someone unnecessarily, I suppose. It casts a certain gloom over life.

Car payments really bother me.

We have a small one right now for the Saab (~$300/mo) and I can't wait to pay that sucker off.

Originally Posted by JST

A payment of only $600/mo? Man, that'd be sweet.

Payments have never bothered me. They certainly don't bother me as much as having an old car (read as, owning a vehicle for more than 24 months). Money comes in, money goes out. As long as the first category is substantially larger than the latter, I'm fine with it.

No way. I am as big a car looney as the next guy, but there is no way in hell you'll see me dropping that kind of money for a monthly payment.

If one insists on thinking in that mindset, I'd rather invest the $600/mo and then pay for the car outright every x number of years, driving a paid for car while saving up.

I have read that as many people declared bankruptcy in this country recently (I think two years ago) as had graduated from college, so being "conservative" may not really be.

That percentage looks to be a good guideline. Remember one should also work into the budget the cost of maintenace, repairs, insurance, TT&L and future replacement if they want to get out of debt.

Originally Posted by Plaz

Sometimes financing makes more sense financially, but I still would rather not do it. I don't know why, really. I just hate the feeling of being beholden to someone unnecessarily, I suppose. It casts a certain gloom over life.

yeah, but not when you're feeling financially secure. The gloomy part hits if things look iffy in you're future or you get in over your head ...

at least with an automobile you can sell it and minimize your debt load, it's the unsecured debt thing i.e. credit cards, etc. that screws most people as they usually end up with few valuables to try and pay it down if times get tough

Originally Posted by The Roadstergal

Hyundais are American?

Depending on youw you define "affordable," you can see a lot of them on the road. My sister's Accord was boring as all hell, but reliable.

See the part where I said "CHEVROLET CAVALIER."

Hyundai's started coming to the US in the late 1980's. They were a big deal because you could get one for about $5000.

How many 5 year old Hyundai's do you see that aren't rolling POS?

Is this a function of build quality, or the demographic that purchases them and does zero maintenance? Dunno, but I'd rather buy Japanese than Korean any day.

For most people, car payments are a fact of life.

Originally Posted by TeamZ4

yeah, but not when you're feeling financially secure. The gloomy part hits if things look iffy in you're future or you get in over your head ...

at least with an automobile you can sell it and minimize your debt load, it's the unsecured debt thing i.e. credit cards, etc. that screws most people as they usually end up with few valuables to try and pay it down if times get tough

One of the reasons people have credit card debt is because they have over spent in the areas of cars and housing.

I think that it has to do a lot with pride. Cars are a symbol of success. So for the sake of our vanity it is more palatable to look good in a car (which everyone sees) and carry credit card debt, than to be debt free and drive something less prestigious.

Originally Posted by Malachi

than to be debt free and drive something less prestigious.

I drove less than prestigious used cars, rarely paying over $6m cash, until my 40's when I felt comfortable paying cash for more prestigious cars, having reduced debt to negligible levels and satisfying other priorities, home, savings, etc. It all comes down to the priorities one sets.