What percentage of income for car loan?

[skives]

What percentage of income should be used for car loan payment if you need to get a loan?

[disneysteve]

Obviously, the best option is to pay cash. If that isn't possible, you should take a loan for no longer than 3 years (36 months) with a payment not to exceed 10% of your monthly take home pay and the lower the better.

That can get virtually everyone with a job a reasonable vehicle. It is not at all difficult to find a good quality used car for $5,000 or even less, so about $150/month or less is all you need to get a car.

[skives]

Is that after a down payment or without a down payment? Thank you for the advice Steve. You are one of the great resources on this forum.

[disneysteve]

Originally Posted by skives

Is that after a down payment or without a down payment?

I'd say after the down payment but obviously the less you can spend, the better.

[nick__45]

Originally Posted by disneysteve

Obviously, the best option is to pay cash. If that isn't possible, you should take a loan for no longer than 3 years (36 months) with a payment not to exceed 10% of your monthly take home pay and the lower the better.

That can get virtually everyone with a job a reasonable vehicle. It is not at all difficult to find a good quality used car for $5,000 or even less, so about $150/month or less is all you need to get a car.

That's actually a very good advice although I think it is safer to keep the monthly payment to about 5% even if that means extending the loan to 48 months at interest rate below 4%.

I am getting a new car myself in about 2 years. This should be a good time where my commuter vehicle can be retired and I'll take over my wife's car as a commuter and get her a new one. Our income should increase by 60% by then if we both work and that will dictate the type of vehicle we would get.

[LivingAlmostLarge]

We paid $150/month for 3 years for our first car = $5k on the loan. My DH's old car. Not bad rule of thumb.

[nick__45]

Originally Posted by LivingAlmostLarge

We paid $150/month for 3 years for our first car = $5k on the loan. My DH's old car. Not bad rule of thumb.

I wouldn't get a loan for a used car, let alone a loan for $5k car. $5k car(s) are what I considered a commuter replacement cars meanted to purchased and driven for less than 5 years and move to the next commuter. Of course, that rule is not concrete because I paid $2.5k for my commuter ride 5 years ago and spented another $1.7k for it last year after 5 years of almost trouble free service. I'll be replaced in 2 years because it is too small to be a safe vehicle. Since I make good money, I don't have to drive a mouse trap to save a few pennies and risk being out of work and disable in an accident. That car was purchased as an impulsed due to D.C. job commute. It paid for itself in 8 months in mileage reimbursement and I use it for regular non-DC commute now. Although it is reliable and durable, it is just too small to be safe. It's a 92 Corolla.

[jerrycates]

Hmmm... I find this thread informative. I would maybe think of considering to finally change cars. Well I said maybe.

[disneysteve]

Originally Posted by nick__45

That's actually a very good advice although I think it is safer to keep the monthly payment to about 5% even if that means extending the loan to 48 months at interest rate below 4%.

The one fault of the rule of thumb is that it doesn't take overall income into account. Someone at either end of the income spectrum shouldn't be following the rule. If you earn 25K, you really can't afford 10% of income to your car. If you earn 250K or more, 10% is way too much. So 5% might be much more reasonable for lower income workers and even less than 5% might be best for higher income workers.

[nick__45]

Originally Posted by disneysteve

The one fault of the rule of thumb is that it doesn't take overall income into account. Someone at either end of the income spectrum shouldn't be following the rule. If you earn 25K, you really can't afford 10% of income to your car. If you earn 250K or more, 10% is way too much. So 5% might be much more reasonable for lower income workers and even less than 5% might be best for higher income workers.

For me, 5% is about the max I plan to spend on a vehicle but I haven't spend that much in 6 years, the time which I paid off my only new vehicle bought after school. Now is a good time to buy a car if one can afford it due to low interest rate and great deal to be had due to low car buying interest. For me, a new car is only logical if it is to be kept for 15 years or more. Anyone trading car in less than 5 years should get a used car.

[Shewillbemine]

Having a car payment AND buying too much car is the quickest way not to become a millionaire.

I rid myself of my sweet BMW and now drive a modest, beater car. I got sick of the high maintenance costs and equally high payments.

In only a few years, I will have saved over $50,000 just from driving my current ride! (shocking, i know)