How much car can one afford?
 

Hi all ...

I was day dreaming earlier today and found this:

http://images.autotrader.com/scaler/..._A.565x278.jpg

http://www.autotrader.com/cars-for-s...gIndex=1&Log=0


Pretty tasty except for it's crazy price tag ...

But then I went ahead and did the payment estimator and put in some semi-realistic information.

What I'm wondering is this; how does a bank or financial institution determine the maximum amount they will loan you? The monthly payment on something like this is pretty ridiculous, but not beyond reason. Is it necessary to have a certain amount of assets saved up before you will be granted anything like this? Are larger downpayments required? Those of you who have experience with this please help me out.

In addition to this, is there a general rule of "how much car you can afford" in terms of actual vehicle price? For instance, could you ever finance a car that was greater than your annual salary? (people do it wit houses all the time :P ) I understand that cars aren't really good investments and that they depreciate and blah blah blah ... but some people (myself included, and many others on here I imagine) would argue that there is more inherent value in the experience it provides (and "lifetime happiness points" you might call them) than the simple monetary value of said car.

Please share your insights. My perspective is the following: I'm about to join the workforce, and have been operating at a minimal expense level while in college.

:thanks:

Try living in AUS same car here

2007 911 GT3 with 43,000 KMs is $159,990 USED

http://www.carsales.com.au/private/d...d&sort=default

You’re sort of kidding, but you’re also sort of serious, I imagine. It’s understandable. You’ve worked hard, you’re about to embark on a real-world adult path, and you feel you deserve a reward.

What would once have been unheard of, bankruptcy amongst twenty-somethings is now commonplace, and on the increase. (So is suicide amongst your age group, sadly.)

You don’t want to do that.

Many young people have gotten themselves into serious financial trouble only a few years out of college. Many, or most, already have a crushing student loan debt burden.

These newly minted graduates follow their impulses, much as they’ve been trained to do, and proceed to buy too much car. They start eyeing desirable goodies just as you’re doing. And they start rationalizing, a powerful and dangerous human tendency.

Liz Pulliam Weston of MSN Money explains how “it all began with a car.”

See: http://money.msn.com/car-buying/the-...ke-weston.aspx

I recommend that you read it, print it, and save it.

Weston is a good writer. She’s responsible, consistent, and reliable. I have yet to see her write anything I would disagree with. Weston is worth listening to, unlike many others who may be more “famous.” Weston gives sound advice.

Do you have a firm job offer IN WRITING? A commitment from a company that is akin to a contract?

It is said that fully half of the college graduates from the past two years are either unemployed or seriously underemployed. Many are boomerang kids, back in their childhood bedrooms, unable to afford to live independently much less get married, start a family, buy a house, etc.

If you've got a solid job awaiting you, congratulations.

Don't go berserk.

That $75,000 used GT3 is not for you, not today. Not unless you're a rich heir about to inherit, in which case why are we having this conversation.

I say treat yourself to a fun car, absolutely. You deserve it, you've earned it.

But until you're debt-free, and are saving for your first house, investing for the full employer match in your company 401(k) plan, paid off your furniture, etc. etc., buy a sensible car.

What's a sensible ceiling? If you were my grandson, I'd suggest around $25,000, assuming you're not stretched by that. If you have massive student loan debt, then maybe not that expensive. You might be able to get someone to loan you the money, even for a GT3, but you're going to be sorry, almost certainly.

******************


"I can resist anything except temptation."
-Oscar Wilde

Honestly I was expecting it to be 200+grand....

In my cases all of my family that have bought cars for 50-100k+ have just paid straight cash. Most really wealthy people that buy lambo's etc finance them with couple thousand dollar a month payments if they can get a great interest rate because they figure they can invest that amount of money and make more from it than have it all sitting in a car that will loose value over time. If they feel the interest rate is to high they will pay cash. So either way you need to be making a lot of money before you buy cars like that. As for your question about when banks will loan the money depends on your credit and income. 850 credit score, making 5k a month they will likley aprove you for a car payment of 2-3k a month as long as you put 15% or so down so if you default they can get their money back.

thats a 1200 a month car payment for 5 years.

dont ask me why.


but the bank will require a serious down payment on that used car , and only finance for 3 or 4 years.

you need to have stable income, at least 8k a month, for a bank to even consider, that if you have good credit and collateral assets

If you have to ask all those questions, you can't afford it.

When you have the cash in the bank to pay for it outright, only then can you truly afford it.

If you get a job paying on the order of $250k/yr *and* get a $75k signing bonus, you *might* think about buying it.

If you can't write a check for a car like that you have no business even thinking about buying it.
:burnrubber:

All good advice.

My take on it is similar. Here's the advice I give my kids. I didn't originate it, but it makes sense.

First, for the OP you aren't really asking if you can afford the car. You are asking if you can afford the car payment. There is a huge difference. Being able to afford a car means you can pay cash for it, or have the cash in the bank that you could pay cash for the car but choose to use someone else's money instead. Here's a good video that covers how car payments keep you from reaching your financial goals.

If you do finance a car you should put down enough money on it to cover the depreciation for the length of the loan. If you can't do that, you can't afford the car payment because if something goes wrong with the sweet new job you need to be able to either pay the car off or sell it and get out of the loan.

In general, all thinks with engines are depreciating assets and the sum total value of all of them should not equal more than half of your annual take home pay, if they are paid off.

These are things that I learned the hard way, and since I've adopted them have worked well for me. Others will have differing opinions, and that's OK.

No serious bank will give a loan on a car like this. So if you have $75K in cash, go get it. Ortherwise pass and wait until you have that amount of money readily available.

Yes they will.

I. This case even affording the payments does not mean he can afford to drive a gt3. Maint costs are very high on new 911s.

Thanks for the awesome responses everyone!

First off, I want to apologize for not making myself clear. I absolutely have zero intention of purchasing a car at this price at any time within (at least) the next three years.

I was moreso looking for a general rule of thumb (and/or legal rule if it exists) of "how much car" someone can afford given a specific level of income. I suppose it could all boil down to simply saving enough cash and then buying it the good old fashioned way, but if you can get a good rate and the payment can be handled without financially crippling you then I'm not sure what the scary part is. (Other than job security, but with the baby boomers phasing out quickly there is likely to be a strong demand/vacuum at the top end of a lot of companies).


Dadhawk kinda caught on to what I was looking for (not to say that I don't appreciate everyone's insight, every 2cents is helpful!):

Keep in mind I don't have many expenses, and haven't encountered many expenses in the past 4 years. I've been living off about a grand per month (outside of tuition). This is a good reason why my perspective is likely skewed and I understand that.

But to me, seeing my income increase 4-7 fold (purposely vague) means that I'll have a lot of excess sitting around, and assuming I make solid contributions to retirement accounts, I could still have a nice chunk left over.

I guess I'd have to bite the bullet and let it all accumulate for the next couple of years (and i'm ok with that), but I was wondering if there was a rule of thumb and/or a way to know how much is too much for a car.

Thanks everyone!

Banks use general DTI (debt to income) calculations when underwriting business. So long as you have enough income they will approve the loan, assuming it is stable and expected to continue. This is also contingent on your credit. TBH, that would be a thousand plus car payment. if you dont already have a house, you might want to consider buying one...or two... for the same price as that car all in with insurance and maintenance costs. The sort of people that buy those cars would generally make 200k + a year.

That car would cost more than my mortgage payment.. Therefore, when my house is paid off, I'll think about it... And my wife will probably think about kicking me out! :D

I used to go by the "Car shouldn't cost more than 50% of my annual income". That was when I made 40-50k a year. Now I don't want to buy anything that's more than 25% of my annual income. Different priorities now, even though I still dump way too much money into car related activities, just not my car payment so much. I also have a personal rule on my maximum car payment, which is $400 a month. No matter if I buy a Ford Fiesta or a GT3RS 4.0, the downpayment will have to allow for no more than a $400/month payment or I'm not going to do it.

The bank is going to look at your DTI, employment history, income, living expenses (rent/mortgage/etc) to determine the risk. They don't have a "rule" that I'm aware of besides making sure the loan makes sense (ie low chance of you defaulting on it, interest rate increasing with that risk).

There are two main measurements of wealth; assets such as cash, real estate, cars, businesses etc, and the second type of wealth is future income. In oither words, your expected monthly salary at present.

Unless you have the assets which you can liquidate to pay cash, or the income that you can afford to comfortably pay monthly, then don't bother. Further if you are young and have yet to build significant assets, buying an expensive car which is usually a rapidly depreciating item, will likely delay you from aquiring significant assets for some time.

As an example, I am married, own a home etc. The FR-S is my toy summer car and a bad investment. However, I was able to liquidate assets to pay for more than half the vehicle up front. Also, since I now own 2 relatively new vehicles, I promised myself I will keep them both at least 8 years since I usually change vehicles ~ every 4 years. This way, aside from maintenance and insurance, I will have spent not much more than I normally do on my vehicles.

That's why you *usually* see a lot of older people driving the really expensive cars.

The version I use of this is that all vehicles (cars, motorcycles, atv's boats, airplanes, x-wing fighters) do not add up to more than 50% of our family income.

The good news is each year everything depreciates so that adds wiggle room.

You wouldn't believe how much a x-wing depreciates the first time you fly it off the star cruiser.

Everyone has great responses. I think it's really a personal decision as everyone will have different priorities. The BRZ is the most expensive car I've ever bought and I almost sweated bullets paying $28k for it. Now, I would say my wife and I definitely make more than your average household but our priorities are tied up in buying a bigger house and of course just general savings and paying off other debt. We can easily afford a higher end car but doesn't mean we should. I've got friends who buy expensive cars and have big houses...BUT they aren't saving shyt. They don't have any kids but I wonder what they will do once the expense of kids plays a huge factor.

I see no problem in enjoying a new job money (I certainly did with a used S2000) but always keep in mind your near/long term goals. I like the 50% rule @dave_ROR mentioned.

LOL!!! :lol:

You might be surprised at how quickly you can spend your increased income. The little stuff adds up quick. I remember being like you in college and thinking "wow, I can't imagine making $xx,xxx.00 a year and not having tons of cash laying around."

Like others have said, focus on buying a house and some land before you even consider buying a car anywhere near half of your annual income.

There's an alternative to this funny caption.

This could be the Viper owner visiting her son and grandchildren at the place they rent. For the first time in American history, parents (Boomers) report that they don't believe their children will do as well as they (the parents) have done. This reflects a trend that is probably irreversible.

The youngsters such as Purdue FR-S and his generation may be looking at hard times into the indefinite future. Purdue looks to have an unusually good start, and more power to him, but he may wish to ponder the significance of the realities of modern America. The opportunities that his parents enjoyed are fast disappearing in our country.

Purdue would also do well to consider that the kind of job security his parents enjoyed is also fading fast.

You don't see what's so scary?

You're about to find out.

I wish you luck. :)

Lol be careful about the number of assumptions you make here. While indeed there was a time when manufacturing jobs were easy to come by, my dad has been laid off multiple times and had to find new work on more than one occasion. I'm not sure what job security you're talking about. :iono:

And to be honest ... I'll admit a lot of my generation needs to get their shyt together; but I'm also pretty convinced that you'll reap the seeds you sow. (In terms of how much time/effort you spend in your youth preparing for entering the job market)


Good conversations guys! Balancing what you want/need is something everyone has to suffer through I'm afraid. I'm also afraid of learning how quickly my extra income will disappear!

It's a strange thing but it happens. When I made 20K a year I thought "man if I could make an extra 10K I could do all these other things" then at 30k it was "How'd I live with just 20k? geez I need another 10k/yr to do those things" and the cycle repeats over and over. Besides wasting money racing I don't have too vastly different spending habits now than I did when I made half the money, and yet, I still don't feel like I have plenty of extra cash to do whatever I want.

Well I guess investing and 401k has taken up a fair enough chuck of that money too.

That's typical. When my parents came here they made minimum wage; now they're pretty set as they spend within their means yet there's always the "if we had $xxxxx more money..." which to me makes money like a drug. You build up tolerance and need more and more of it to get the same effect it used to give you. Eventually you can OD and die (bankruptcy).

"Beggars make rags
Rags make paper
Paper makes money
Money makes banks
Banks make loans
Loans make beggars
Beggars make rags"

Anonymous. English 19th Century.

I think you may be leaving out the "more I earn, the less I get to keep" portion of this. That has a much bigger impact than people realize.

I was purposely leaving that out. I love paying my taxes after all :happy0180:

That too. Taxes only go up!

aaaaaaaaaaaaannnnddd this thread got a lot more depressing :sigh:

Yep, sorry about that. Of course that wouldn't happen if folks had to write that check every week. It'd be a whole different world.

Exactly. If you are responsible, the more you make the more you should be throwing into retirement investments or you will have a pretty damn harsh reality check around 55-60 years of age... So while oftentimes people make more as they become older and wiser, if they are good with money they are responsibly saving and not blowing money left and right. You always have to live on a budget. Applies to people making $20K a year. Applies to people making $2mil a year. :)

A car like a Porsche GT3 or Lambo or Ferrari... I think in reality, maybe about 1 in a couple million people can REALLY affort a vehicle like that if they are responsible with their money. Sure lots of people have them, but many of those people are living way beyond their means.

Just out of college, I think it would be crazy to dump that much $$ into a vehicle. Even if you are lucky enough to enter the market making $100K+ a year.

Good luck with your money decisions.

There is never a point where making another dollar means you take home less than prior to making that dollar. Marginally you will take home less of the earnings, but your overall take home will always increase.

I think he understands that.. I figured he meant as you pass into new tax brackets that additional money is taxed higher so you see less of it. Yes, your take home will still increase but you might get less of that 10k raise than the last 10k raise if you were at the edge of one bracket before, etc.

Yep, exactly what I meant. In general as your income increases the overall percentage you see of it in your checking account decreases. That's why when you "double your salary" you don't really.

Also, @rhoyle your statement above isn't 100% accurate thanks to the unearned tax credit. There is a point below where you get back more as a "tax refund" than you pay in. So, technically once you pass that point you do see less overall money in a single year. That said, I certainly wouldn't want to live at that level just to avoid it.

Exactly. Over the years I've made a comment a number of times and that is I wished I had to pay twice the amount in taxes that I presently do. It would always bring a puzzled look on peoples faces till I explain it to them.

You might like this article (or not, haha), which recommends spending no more than 10% of your annual income on your car.

http://www.financialsamurai.com/2012...e-must-follow/

That's pretty conservative though. Here's some interesting information as well, showing what typical owners of various brands spend on cars as a percentage of annual income:

First number is annual household income, second number is average vehicle cost, and third is percentage.

1 in a couple million? There are several hundred billionaires in this country, and to them a new Lambo is like a new pair of shoes. To take the nitpicking to the end, I'd say maybe 1/200 people (that's like high 6 figures income?) can afford a 200k car. I think most people in this country don't care that much though. If you go to Asia where people are more social status conscious, you'll see a crapton of Merc S-classes rolling around (they pay 200k for those because of import taxes) and such, even if per capita income isn't much higher than it is here.

Anyways, 10% of your income on your car is 10k if you bring home 100k after taxes, and a mid level European luxury car is easily that much in payments (or payment singular amortized over the lifespan of the car) and running costs, seems like a good guideline?

im just going to leave this here lol

[ame="http://www.youtube.com/watch?v=8xBaKmqFQsc"]Lamborghini Gallardo - Dealership commercial - YouTube[/ame]

[ame="http://en.wikipedia.org/wiki/Billionaire"]Billionaire - Wikipedia, the free encyclopedia[/ame]
A whopping grand total of 425 US billionaires out of how many people total in the USA?? That's a pretty tiny number of people overall in the US. A billionaire can buy those cars easy. No question, but that is barely anybody.

All the crap you read about millionaires (maybe 1% of the population or so) most of them have "net worth" of a million or more. That is not the same as having a million or more of disposable income to spend on cars and other crap. I may have exaggerated a little, but I don't think I'm that far off of the number of people that can that easily throw around money. Now granted lots of people like other people to think they have money and live beyond their means and buy cars like that new for hundreds of thousands of dollars. But that doesn't mean you should model your lifestyle off them.

lol yup, you said one in a couple million, there are ~300 million people in the US. So more than 1 billionaire per 1 million people.

Umm you can also be a millionaire with a net worth of exactly $1 million, and still not have a dime of liquid assets to your name. And assets like real estate drain your liquid cash for taxes, maintenance, utilities, etc.

Bottom line is whatever your worth, there is always another hurdle that is "better".


My parents have a friend whose son is a billionaire (really). Apparently, he never spends a dime on his elderly sick dad, despite the fact that the dad worked for him for many years and is a decent guy. If anyone is curious, the son used to own Direct Energy and sold it a few years ago for an astronomical figure.