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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.
There isn't one - but if the term is more than 12 months you should take into consideration your overall DTI.
20% is fine for someone that doesn't have or plan to have a mortgage. 5% is a lot more manageable over time. Another consideration is whether you can afford to pay the loan off lump sum now or in the near future. Taking out a $50K loan when you have $50K+ in the bank is different than if you really need 5 years to pay it off.
20% of monthly salary is a lot to spend on a vehicle. Consider that qualifying for mortgages usually works on debt to income ratios such as 28/36% where 28% of gross pay = the cost of principle+interest+taxes+insurance. Almost no one would spend 2/3 as much of their mortgage on a vehicle.
Over the last twenty years I have not purchased a vehicle whose purchase price was more than 25% of my annual pre-tax pay. On a monthly basis I cannot fathom spending more than 5% of my monthly pay on a vehicle.
When I was young, fresh out of college, I bought a car that cost about 55% of my annual salary. I financed for 48 months. I was single, renting, and my salary was rising. It was no big deal to make those payments at the time, but I would not recommend that today.
General rule of thumb when buying a car? You're not allowed to beat the salesman or finance manager with a stick wider then your own thumb after you realize how bad they screwed you over.
I think my wife and I combined have car payments equivalent to 8% of our combined gross. That said, we also have the funds elsewhere to pay off either loan at any time (and we did from day 1 of purchasing the car). Since the loans do not impact our ability to comfortably pay our normal living expenses, typical luxuries (TV service, etc), or ability to properly save, we are happy with the situation. Our house is also paid for, so we have no mortgage to service either which makes it easier.
Not sure I would want to sink 20% of our gross into car payments, if I didn't have to. Once you boil it down to net, thats going to be a rather big chunk of your overall funds... and unless you are pulling a rediculous salary it is bound to make doing other things a little tight.
of course, it all depends on your actual budget details, and expectations.
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.
Simple rule of thumb is to pay cash and avoid paying a cent in interest.
DITTO.
You buy cash, and drive her till wheels fall off. Money saved go into retirement and wise investments.
But this is falling on deaf ears anyway.
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