How much car can one afford?

[Purdue FR-S]

Hi all ...

I was day dreaming earlier today and found this:



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.

[monkie]

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

[Porsche]

Originally Posted by Purdue FR-S

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.

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

[WillBRZ]

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.

[njccmd2002]

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

[ZDan]

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.

[whaap]

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

[Dadhawk]

Originally Posted by Porsche

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.
....

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.

[avp1]

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.

[Dave-ROR]

Originally Posted by avp1

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.

[Purdue FR-S]

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!):

Originally Posted by Dadhawk

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.

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!

[powertrip]

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.

[n2oinferno]

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!

[Dave-ROR]

Originally Posted by Purdue FR-S

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 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).