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I used to work for an auto finance company. Anytime an app was over 15% pti, we knew we had someone who makes bad decisions on our hands, and we really made sure we would be in a good spot when we repo'd it.
My car now is just a tad over 10% pti on gross pay. And that is relative, 10% pti on an entry level income is harder to keep up with than a 10% pti on an engineer making 10k a month.
If someone makes 6k a month, Id hate to finance them on anything more than 700/mo. But again, pay attention to the context. That guy buying a Honda Civic and financing for 36 months is a vastly better loan than a guy buying a used Jaguar and financing for 72 mos, even with the same income and payment.
Methinks your post would be alot more useful to us chickens if you didn't litter it with industry jargon.
Methinks your post would be alot more useful to us chickens if you didn't litter it with industry jargon.
by PTI, i think he's referring to pre-tax income or gross income.
Just to add, the most savvy & shrewd personal finance guy I knew was my godfather, who was this wise old Jewish accountant/wealth manager in LA. Even before i could drive he was admonishing me to never buy a car (new or used) that costs more than 25% of my annual salary. I think that still rings true today, whether you pay cash, finance or lease.
Many of my friends who're in their early to mid-30's are now at the stage in life where they're being promoted, making partner, getting bonuses and want to treat themselves to that 328 or Q5. They really approach car shopping with blinders on, strictly looking at monthly payments, instead of considering whether the total outlay works for their level of income.
Many of the new cars are available with 0 or less the 1% interest these days.
My 2006 Ford Focus came with a $1500 cash back offer OR low interest financing. I paid cash, but if you took the low interest financing, you in effect paid $1500 interest up front.
Many of my friends who're in their early to mid-30's are now at the stage in life where they're being promoted, making partner, getting bonuses and want to treat themselves to that 328 or Q5. They really approach car shopping with blinders on, strictly looking at monthly payments, instead of considering whether the total outlay works for their level of income.
If they still have to consider monthly payments, they shouldn't have their blinders on.
Op, there is no rule.
Pay the least amount possible to get something that works for you.
That has always been my rule of thumb.
Making up percentages will lead to a waste of money.
How much car can you afford? Three good rules of thumb which should keep you in the right ballpark: 1. If you have no other consumer debt, take your gross annual income and divide by three. The total purchase price of the car including all taxes and dealer fees shouldn't exceed that. 2. Ideally, you should have enough saved up to have the ability to buy the car in cash, whether or not you actually choose to do that. 3. Ideally, your total cost of driving/transportation, including interest on the loan (if any), depreciation, gas, insurance, registration, maintenance/repairs, etc, should average out to no more than 20% of your monthly budget (that's take home pay after all taxes, 401k contributions, and voluntary payroll deductions), over the long term. How you decide to pay for the car, whether you buy with cash, finance, or lease, and for how long, is your own business. As long as you're not living paycheck to paycheck, don't think in terms of monthly payments. Think in terms of total cost of ownership over time.
Which is fine if you have the funds parked somewhere to pay it off if you need to.
Why would anyone need to suddenly pay off a car? If low to no interest financing is available, why not use it? Why pay cash for a car that is instantly worth less than the cash just paid? If I can easily afford low interest payments, why would I wait until I save up for a new car?
I've never understood why people think throwing 10%-20% away is a good idea. Being able to afford something does not necessarily mean being able to pay cash for it.
Quote:
Originally Posted by mshultz
My 2006 Ford Focus came with a $1500 cash back offer OR low interest financing. I paid cash, but if you took the low interest financing, you in effect paid $1500 interest up front.
It's all in the negotiation. When I bought my last new car I got the low interest offer, which I was told came with no discount. After an hour, it came with a discount.
I'm not sure I agree with all these supposed guides on how much to spend. If I'd followed them, I would have driven beaters my entire life.
Sorry, PTI is Payment to Income, DTI is Debt to Income.
Buyer with $5,000 monthly income with a $500 car payment, and $2500 in total monthly debt payments(the auto payment, rent, credit cards, everything that shows on your credit report) would have a 10% PTI, 50% DTI...
Loan officers freak out if DTI gets much over 40%. Because once you take out taxes, and utilities that dont show on your credit report, you know that guy is living paycheck to paycheck.
What is a simple rule of thumb to use when buying a new car, is it like 20% of your monthly income or what? For example, if someone brought in 5.8k a month, and 20% of that is a little bit over 1k. Thanks in advance.
Don't buy a used car from a dealer.
If you are going with a new one (or close to new), consider one that is a few months to a year old with low miles on it. Maybe from an individual.
Figure what you think you can comfortably afford, then knock off 20% to address surprises (like insurance or maintenance or secured parking, or coll new sunglasses so you look cool in your new car. . . . there is always something you did not anticipate.
Ignore talk of monthly payments. Deal with total cost, even if you are financing. If the salesman keeps talking about monthly payments, find another salesman or dealer.
Salesman talk about trade-ins like they're a discount off the price. For example, "I'm offering you the new car at $20,000. I'll give you $5,000 for your trade in, so this new car is really only costing you $15,000." No, he's probably lowballing you on the trade-in and/or inflating the price of the car. They're seperate transactions, and negotiate them seperately. And the only real advantage of trading a car in is if your state allows you to calculate sales tax based off the new car price minus the trade in price.
Everything is negotiable, unless demand > supply.
If you want a fair price in a short time, go to Edmunds and find the forum for "prices paid". Print out a few pages, and bring it in to the dealer.
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