Auto loan as % of income
 

Where do you guys fall?

I would be around 18%, I think I should really be patient and save to get a larger down payment but I'm growing impatient. This car looks amazing.

What do you guys recommend?

As a percent of income? I would think anything over 10% of net would be excessive on a 5 yr loan. I'm not really sure it's a smart decision to purchase any new car if you don't have the means to pay cash (not that you necessarily SHOULD pay cash), but I definitely do understand.

Do you mean the total amount that one will have to pay over the term of the loan, versus the total amount he/she will earn during that time (in percentage form)?

On a risky side, I would think putting down enough in a emergency event of needing to part ways with the payment. You should put down enough to be able to sell it immediately.. Yes, you would lose all of that down payment in that event, but thats always better then having the car repoed and destroying your credit. I could see these car holding their value pretty well though.

A rule of thumb I've heard is that no more than 25% of your POST-TAX monthly income should go towards your vehicle. This includes the loan, insurance, and gas (est). Of course, this is not a one-size-fits-all statement, just a generic rule that doesn't account for your other life expenses. I have seen this paired with another rule of thumb that states not to spend more than 30% of your post-tax monthly income on rent, for example.

Personally I'm at 23% of post-tax monthly income on a 4-year loan with 5K down and it's not a problem at all. Again, these statements mean nothing unless you look at your own finances & budget and see what you can afford.

10%

Mine's about 9.8%, let's round that up to an even 10.

It's more about disposable income. If you make $8/hr, but live in your parents' basement rent free, and have no goals to ever leave, spend it all on your car if you want. If you make $1M/yr, but have 4 houses, alimony and child support to multiple people, and don't have $5 at the end of the month to put in savings, you can't afford this car.

It's all about your comfort level too - but there reaches a point where the price of a new car outweighs its benefit to you. The FRS/BRZ twins are affordable, but still 2-4x the price of a decent used car.

Traded in my Si, wrote a check for the rest. Should get the title soon. Did the same thing on my Si. Only thing I've ever bought on credit is my house and I plan to have that paid off 24 years early.

Well according to Subaru marketing the target demographic of the BRZ makes approximately 90k a year so that would put it at about 30%

But it's useless to talk about this type of thing on the internet because everyone is an expert and thus no conclusion can be reached ^_^

^ I make a billion dollars a month, but just drive a BRZ because I don't like conspicuous consumption.

It all depends on your personal situation. As a rule of thumb, try to figure out what your minimum monthly payment is going to be, and then see if you can afford paying an extra $100-200/month. This will help act as a "buffer" as well as force you to pay extra each month which will help you save on interest.

So say you can really afford around $600/month for a car, try getting your financed payments around $400 and then each month pay extra towards your loan.

I made $82K last year so I'm right in there. With low expenses, no debt other than the house, and no kids, it just didn't make sense to finance.

I believe it. Everyone I have really seen locally with the car (FR-S at least, no local BRZs) has something much greater in the garage. There is a sales guy in Helios with a Koenigsegg Agera R that I could swear I saw leaving the garage in a white FR-S. Out of the many I have seen I have not seen anyone without grey hair driving it.

In the end it comes down to personal comfort levels and financial philosophy, so all that follows is personal opinion, but the advice I'd give my sons.

Best option is always cash, but having a car be a double digit portion of your available cash/income is not good. Even a house payment should not be more than about 25% of your family's income.

I put down about a 1/3 down on the FR-S, and have a low interest (2%) loan on the rest, but also have enough money set aside in the bank I could pay it off tomorrow. The last 4 vehicles I've purchased I purposely saved and paid cash for, and bought used if necessary to do so.

In the end a car is a depreciating "asset" and you will not get back most of the money you put into it. Putting yourself in a potential financial bind for it is not fiscally smart.

I make $66k/year and my loan worked out to $500/month. If I wanted to I could pay off the car but I am saving that money for a down payment on a house. I'm hoping to have the car paid off in 2 or 3 years.

Kudos! Sadly, more people should be doing this...but apparently no-one knows how to save anymore :(

Most people see it making more sense to take a loan at 1.75% than plunk down 27 grand. I understand the idea, but debt isn't necessarily 'bad' depending on how the numbers work out. I paid cash for my house (greater ability to haggle and reduced price outweighed the benefits of mortgage interest deduction) and get small loans for my cars.

Having debt is perfectly fine - provided you can manage it. Having no debt will actually work against your credit (like you guys don't already know), so for those who are younger and looking for a car would benefit from putting ~25% down and the rest on a loan so long as their finances make sense with the addition of a car payment + insurance.

This is crazy logic that I often hear repeated and it just makes no sense. You've been conditioned by the banks if you actually believe this.

Debt is NEVER good (though largely unavoidable when buying a house) and should never be used if at all possible. If you want to get played by the banks, have fun with your "manageable debt" (this really just means the banks are "managing" to make a living off of you!).

One of the primary reasons North America is still in recession (in case you hadn't noticed!) is because of people taking on debt, instead of saving like the old days!

:cry:

I think what he's getting at is rates are so low right now that you can receive greater return on your capital by investing it rather than buying a depreciating asset outright. Different strokes. I'm paying something like $400 in interest over the life of my loan--it's practically nothing.

Yeah, "practically nothing". That's how they get you. Anyway to each our own I certainly don't expect to change any minds but the facts are what they are - that $400 would be better off in your pocket than the banks!

You can justify it any way you want, it's not my money you are losing :)

Unless you are getting a 7% return on that money and you're paying 1.75%. You're 5.25% better off. You also have to consider liquidity, with a vehicle lacking in that aspect.

No, actually you aren't. If you paid cash for the car, you would pay no interest.

If you finance it, you pay your "only $400".

One of these results in you being $400 richer in the end, and it doesn't take a genius to figure out which it is.

I don't think you understand. That's alright though, like I said, different strokes.

Let's say you have 27,000 grand that you can either invest or use to purchase a car. Assuming a 7% return, in five years your lump sum is worth 37,868, which is substantially less than you are paying the bank on a loan. Does that make sense? There is always an element of risk, as 7% is not guaranteed, however.

The math isn't actually that simple, and you certainly won't get 7% guaranteed anywhere these days that's for sure.

Anyway you spend your money as you see fit and I will do the same.

Wow... so tell me, if a bank will loan me money for 2.9%, and I can then take my income and invest it in stocks that return 20%, how is debt not good?

Might as well just invest on margin if you are capable of risk.

While we're at it why don't we all just start wearing tin foil hats and living underground? It's all a conspiracy and the banks and government are all out to get us! :bonk:

If you've got the money to buy the car outright then super. With Scion's target demographic being the 18-25 year olds I doubt anyone in that age range just has 27K just kicking around burning a hole in their pockets.

The fact of the matter is that you can't build credit without being in some sort of debt - and paying it back. 18-25 year olds NEED to build credit. What better way to do that than with an auto loan?

As mentioned, the math isn't that simple as you are leaving out factors such as inflation, taxes, etc. Also there is an element of risk involved.

In addition, if you pay cash for the car, you can always sell it as a relatively liquid asset should you need the cash. Yes, it will be at a loss (below market) but if you have a loan you cannot offload that debt as quickly unless you have cash on hand.

(I say that as someone who does have a car loan on my FR-S as I describe above that I plan on paying off in 6 months. It was a short-term decision not based strictly on fiscal reasons)

Actually, you don't NEED to build credit but it requires you to be willing to always pay cash. Again, its a different philosophy that has been argued on this forum dozens of time.

It's basically the religion of "Rich Dad" vs "Dave Ramsey". You aren't going to be able to convince zealots on either side to jump the fence.

TDS and GDS are what you're referring to?

TDS is the total monthly cost of your House costs (Mortgage Payment + Property Taxes + Heating) added to all of your other debt costs (pretend your credit cards/lines of credit are maxed out), then divided by your GROSS (pre-tax) income. This number should not exceed 40 percent.

Your GDS is house debt only (Pmt+Prop Tax+Heat) divided by Gross Income. This number should not exceed 32 percent.

If it was that simple everyone would be doing it. You could gain 20%, or lose 100%. If you've never had a loss, you just haven't been doing it long enough.

The right answer depends on the person and how they deal with risk.

If I could get a consistent 20% year after year I could retire right now... wouldn't that be nice.

True, But you can still get a good 3-4% on the dividends for quite a few companies stocks. In this case you would be better off financing at 1.75% and using the cash for the stock ... :happy0180:

This is the more reasonable scenario in today's market.

Debt is bad, but sometimes slightly less bad than other options.

Oh, and there is no reason to think that there are no 18-25 year olds with $25k+ in the bank. All you have to do is make a decent living and save, instead of spend, your money.

-Charlie

PS. It is good this discussion hasn't gotten in to credit cards... :slap:

I had the money to pay off my FR-S completely but didn't do it for a number of reasons:

I received a finance rate of 1.8% on a 60 month loan provided my loan was at least $9000. So I ended up financing $9000.

I can make my monthly payment with my credit card where I earn 1% cash back on all purchases. As long as I pay off my credit card bill in full each month (which I have always done) there is no additional interest or charges. The 1% cash back essentially, reduces the amount of interest I would be paying.

Now, that $9000 is available for investment. I could put that money in a 5 year CD and earn 1.5 - 1.8% interest guaranteed (but not have access to that cash for 5 years). I could put a portion of that $9000 in my IRA each year. I could let it sit in a normal bank account and earn .025% interest.

What I ended up doing was keeping that money in my brokerage account where the money was already invested in a particular stock. Between the purchase date of the FR-S and today I have already sold that stock for more than the total interest I will pay over the 60 months of my $9000 loan. So, if I don't invest that $9000 anymore, I will already be ahead of someone who paid for their car in full. In fact, the money is sitting in my brokerage account earning .04% interest while I wait for a stock I want to buy. Of course, I could take that $9000 and make a bad trade and end up losing more money than the person who paid in full. That's a risk. However, for me, having that money available for investment was more important than paying 1.8% interest on a $9000 loan because I anticipate (not a guarantee) that over the 5 year loan, I will make more money than the total interest I will pay on that loan.

There is absolutely no bright line rule for when to pay for something in full or take out a loan. Fiscal responsibility doesn't necessarily mean never being in debt. This is also coming from someone who enjoys listening to Dave Ramsey!

i'm going to assume you're of the older generation that don't believe on the benefits of debt.

debt is neither good or bad. it depends on how you make use of it. would you say taking on a college debt is bad? have you looked at the financial statements of large companies. (rhetorical questions)

you cannot just blame the economy on debt alone. it isn't that simple. why do you think we have phds writing about the 07/08 financial crisis? for fun?

please do your research before just making statements on the internet.

actually the best way to build one's credit is with an entry level credit card and paying it off each month.

IMO education debt and luxury debt like a car are 2 totally different categories. $100k debt from med school is acceptable to me while $100k car debt isn't.

Then again i'm new to all this credit stuff and i'm basically only using a credit card right now to build credit

you're right, but the poster was saying debt in general was bad.

if you actually think about it though, the two debts aren't that different after all.

with an educational debt, you can quantify how much your reward is with your future job's salary.

when you buy a car, your reward is 'happiness'. it is difficult to quantify this, but the concept is still the same.

everyone takes on debt in order to gain some type of 'reward'.