mcourt83

I apologize in advance if this is too off-topic for this forum.

How much is too much to spend on a car? If you buy a $28,490 car and have to finance $28K, is that a warning sign? What if the only way you can afford the payments is to finance the car for 60, 72, or 84 months? What if you can swing a 36-month loan, but have $25K in credit card debt?

I'm not asking for myself, I'm just curious as to what people think. I know many people -- maybe even a few here? -- who drive beyond their means.

Mike

ClutchPerformer

I think as long as you're able to legitimately make the payments (in addition to all your other debts/bills), you're fine regardless of the percentage of your down payment or the duration of the loan. How long it takes you to pay for something isn't (or shouldn't be) a measure of whether you can "afford" it.

That being said, it's definitely possible to make bad decisions about what you're getting in debt to buy (e.g. 10 cars vs. 1 house). But that's none of my business....

moda_way

It is a calc of the cost of interest. Look at the interest it would take to afford a car the months suggested. Basing a purchase solely on payment is short sighted.

You also have to consider what the cash flow looks like to the balance sheet. What I mean is, if you lease, it technically isn't an asset so you don't own anything and it looks better on the credit report. If you take debt to own, then you have a cash outflow and an asset which sits as equity; can make credit look worse if you already owe on credit cards.

Now, low interest debt can also be a good thing because you have liquidity on your assets which you are paying more towards principle rather than interest.

The easy answer is, if you owe a lot at a high interest, don't buy. If you owe a lot at low interest, consider buying.
If you owe very little and own very little (ie no credit), a car is a good place to start, but you'll want a 10% or greater down payment to help decrease the risk for a loan which translates into a better rate.

dom

I personally would never finance 28K of a car that costs 28.5K, thats almost crazy. Nor would I finance a car for over 60 months and 60 is even pushing it.

And 25K in Credit cards debt Credit Cards charge 18.5% interest at least they do in Canada. So thats a huge amount of interest to be paying.

But your basic question I think is almost impossible to answer. It all depends on the individual and their cash flow situation. Will you still be able to save any amount of money after the car payment, insurance and gas costs? (+ Mods ) That's I think the important question.

gonova

You knew you were going to get this answer: it depends. Depends on your tolerance for debt, your immediate circumstances, long-term prospects, how much you value the pride of new car ownership, etc. I personally see an amazing number of people will monthly payments (even lease payments) that are an astounding (at least to me) percentage of their take home pay. My good friend is paying over $550 a month on a freaking Accord! For 5 years!

And too many people don't take into account things like maintenance, gas, insurance and unplanned car expenses when making a purchase. You're $300 car payment may be more like $450-$500 a month when those things are factored in.

majormojo

Someone with $25K in credit card debt should be shopping for a used bicycle or a bus pass, not a new car.

It really does depend on personal circumstances, but as a general rule of thumb, I'd say that if you are paying more than 10% of your take home pay on transportation (car loan/lease pmt, insurance, gas, maintenance), you are driving beyond your means. Unless you live in your car.

If the car is used for business, I don't see any problem with financing the whole thing, but make sure you're going to keep the car long enough that you don't end up "upside down" (negative equity) on the car when selling it.

bob shiftright

According to Credit Suisse, in the US average car payments were about 5.5% of disposable income for the last month available, which was July.

So if your friend has a take-home pay of $10,000 monthly he should be, well, he should be average.

Buff-Daddy

1st of all, if you have a 25k debt, you cannot afford a 36-month loan. I know you CAN, but turning your back on that debt is not going to make it go away. Once that debt was paid off, then worry about what car you can afford.

gonova

That is an interesting number. Can you supply a link to that report? I am curious if that only accounts for people with payments. Otherwise, there are a lot of zeros in the average (people with no payments), which will bring it down significantly.

That number also reflects what people are actually paying, not what they could afford to pay. The long terms loans discussed above also would lower this number, but are not necessarily indicative of financial stability.

mcourt83

Not that anyone cares, but my question is hypothetical. I actually have no credit card debt and I financed only a little more than half the MSRP.

But, I've been watching the Suze Orman show lately , and I'm amazed by how much some of the callers are trying to juggle.

My own rule: If I can't pay for it in three years, I won't buy it.

Mike

dnb

This is all just my opinion, of course. But If I were in the above situation, I'd do all of the following

1. pay off the credit card debt
2. pay off all other high-interest debt
3. start retirement savings

before buying any car other than a used econobox.

dnb

You can say the same thing about housing in the Boston area. I find it amazing that people can afford to live here, considering the median household income in MA is ~$43k.

bob shiftright

Sure, it's a pdf file: Credit Suisse/First Boston "US Economics Digest, 19 September 2003 "What's Keeping Auto Sales Aloft?".

Chart 7 on Page 4. Number culled from the chart. If you're an Economics junkie, the report is fascinating reading. (I'm an Economics junkie.)

http://www.csfb.com/home/research_an...s/30979972.pdf

Spud

A few points from my perspective.

a) doesn't matter what percent of the car you're financing, as long as the payments are comfortable for you (I mean the hypothetical "you").

b) If you're stretching the term beyond 5 years to afford the monthly payment: probably good to consider a less expensive car.

c) A car payment, like any other expense/asset should be reasonably proportional with your other priorities and your other assets. If you're limiting yourself to a cruddy basement apartment, no new clothes and no savings, etc. to afford the car: probably not a great decision. This is even more important to consider if dependents (e.g. kids) are in the picture. A car is often the second largest purchase most people make, but it should not take precedent (in terms of the price of the car) over more essential things.

d) Credit tolerance is another point, but at the end of the day, if too much is falling off the table to afford the car, it becomes less a question of tolerance and more of economics: I, for example, could buy a Porche, but high credit tolerance or no, I'd be eating out of a trash can to afford it.

e) Again on credit, whether you have a high tolerance or not, at some point your letting yourself get screwed: If your just getting the going rate, financing over a long term and possibly even carrying a balloon payment at the end of the financing term all in order to afford the monthly payments, the financing charges could be 50% of the MSRP: that would be a good example of one letting one's self get screwed.

At the end of the day it's all about balance. My $0.02....

rb4580

That's an awesome rule......... I gotta tell the wife that one!

biker

With the exception of a house you should try to pay cash for everything at the time of purchase. Unfortunatelly almost everyone considers a CC to be a Credit Card - it should be viewed as a Convenience Card. Unless somehow your cash provides a better rate of return than the finacing of whatever you're buying you should always pay cash. YMMV depending on circumstances. Unfortunately if everyone in the US subscribed to the above there would be a depression in the US. Easy availability of credit makes a lot of things possible - including big financial trouble.

bob shiftright

Ummmmm, well, since we use airline affiliate credit cards, adding the credits to our frequent flier miles, our vacation to Hawaii last January was mostly free, including three business class round trip tickets and accommodations overlooking Waikiki Beach. We had to pay or my daughter's surfing lesson, rental cars and meals, however. My point is that there are "goodies" from using the right credit card. Just be sure to pay them off when the bill comes.

I'm usually the voice in the wilderness about this but the only good reason to take on debt is for something that can reasonably expected to be worth MORE in the future, not LESS. Education, real estate or a business. NOT something like a car that will eventually be worthless.

kenbiddulph

This is a good topic, I've sold cars to people who finance the entire price.

People who buy 40,000 dollar vehicles with no money down REALLY should buy something used. There is no reason to purchase a vehicle that expensive without having the cash to do so.

Crazytree

1. A CAR IS A DEPRECIATING ASSET
2. you should never carry credit card debt... if you are, that's a big red warning sign that you're living beyond your means
3. I use a credit card that gives 1% cash-back, but pay it off EVERY MONTH NO EXCEPTIONS
4.

jackspat2

What if you saved your money for 3 years and just paid it off? Plus make a little interest on your money that you're not paying.

Crazytree

you're still paying interest... about 40-50% over 3 years factoring in depreciation.

Soze75

This is most important when purchasing the things you needed when you had to get rid of the "evidence" that was hogging valuable freezer space which was once home to various cuts of FDA approved meat.

Brad

Credit card debt is a big sinkhole.

My advice is:

1). Get rid of that credit card debt FIRST!

2). Then charge only as much as you can afford to pay the cc bill in full every month so that you don't carry forward debt, finance charges, etc.

3). This will let you save for a bigger down payment--or better yet pay in full $28K.

Rather than getting into viscious never-ending cycles of credit card and loan debt, that person should get their feet on the ground, and stop having to pay finance charges!

If someone doesn't think my advice works, then tell me about it. I do it. I routinely use my credit cards and NEVER pay credit card finance charges. I paid cash in full for my TSX because not only is my head above the proverbial water of debt, but my feet are on the ground. Why people choose to go into long-term debt for using credit cards is beyond me. I can now save up for my next car, vacation, home improvements, et cetera rather than devote my earnings to finance charges.

Given the situation, I honestly don't think it's smart to go into debt for sake of getting a new car with all that debt baggage.

Crazytree

if you owe big money on credit cards you have two choices:

1. live frugally and pay off the CC debt
2. continue to be a CC slave for the rest of your life

if you choose 2 and buy a new car... don't cry six years from now when you can't afford a house and you're overwhelmed by debt. you made the decision.

ALFA

Except for the house, I don't buy anything that I don't have the cash to back it up. That doesn't mean I don't use credit, I use credit as a financial tool, but I have my money invested where I believe I can obtain a higher return than the bank is charging on the loan. Given your scenario, I agree with others, don't get a new car, not only is a bad investment, but it is a luxury. I just got my first new car at age 39, and trust me , I could have afforded a new car a long time ago, but real estate has been a much better investment. I drove used cars until now, and if I could had found a used car that matched my expectations, I would have gone that route without hesitations. I strongly believe that a lot o people that you see around in new cars should not. That is of course IMHO.

mcourt83

And that, in a nutshell, is why I started the thread.

ALFA

And you can quote me on that.

dnb

Agreed.

And since we're speaking of "goodies" from credit cards: Most people are aware of rebates coming from the use of Discover cards. I'd like to point out that a number of Visa and MasterCard accounts (with no annual fees) now offer rebates as well; you just need to search for these on the 'net.

tgrundke

It's all relative. Actually, it depends on your priorities and your income. If money is no object, then you wouldn't be asking the question, so obviously, money *is* a concern.

My general rule of thumb and recommendation to people is to think carefully and recognize that an automobile is a *depreciating asset*. Any money that you put forth into the car will not return anything in the long run. I'm in the position today where I'm selling off my beloved Jetta VR6 in order to raise the cash to buy a house. This is going to put me into driving a base Honda Civic for a while, but so be it. In the long run I'll be much better off.

Another rule of thumb I use is this: Learn from your grandparents and avoid the lure of 'instant gratification.' In other words, this means to save, save, save and forego the desire to buy now. Apparently, whomever it is that has $25,000 in credit card debt didn't get this message (I apologize in advance if the debt is due to emergency circumstances, such as medical expenses).

A 60 month payment is pretty much 'standard' these days, but 72 months and higher to me means that you are buying outside of your means.

I usually take out 60 month payments but end up paying off the loan within 40-48 months, saving me a good amount of interest.

If you are carrying so much debt already, does it honestly make sense to add another $28,000 on top of that?

Keep in mind that capital is cheap these days and everyone is pushing people to overextend themselves. On my recent mortgage I was pre-qualified for a $350,000 home yet I only requested $95,000. What was amazing to me was that the bank did not care. Incredible.

duugk

Thanks Bob.
You're kidding me! Tax cuts actually stimulate the economy, and give us regular guys more spending power! Who would have thunk it.....maybe they even help the economy so much that gov revenues even climb. Looks like we need to continue the demise of the democrat party. .

As for 25k in credit debt. If the interest rate is the typical 18 or so percent, you are probably spending a car payments worth of money on just finance charges. Definately run to the used econobox until that credit card burden is paid off.

duugk

Brad, there is another option. I agree with you about the credit card debt but not the car loan or home loan debt. Think about this. You pay 28k for a car in cash. I put that cash into equities (figure 8% avg annual earnings, but last 12 mos I earned 27%) and get a car loan for 4.4%(or even less depending on your credit history). Most cars don't appreciate over time which makes them crappy investments.
My advice is to put enough money down to make the payments reasonable and finance the rest while investing the rest of your money wisely. You can make your money work more for you that way, especially if you are as responsible as you sound. If something happens and you have to pay off the loan, no problem, the money is still there.

Brad

I am making no car payments _now_. I can put _all_ of that money that I would have made in car payments to work in equities or what-not _now_ to save for the purchase of my next investment, car, vacation, etc.

My money worked for me to be able to buy the TSX.

The only long-term debt is my mortgage--and I'm working to pay that off sooner than the loan term.

I do not understand the logic or benefit of long-term credit card debt. It escapes me how some people use their credit card because they cannot afford things but they want things NOW? It's a cruel joke and grossly ironic that they feel that they can afford long-term credit card debt. In a real emergency, I would understand. It therefore escapes me someone can feel "comfortable" making long-term credit card payments.

chrisalberts

Slightly different perspective. The way to determine how long to finance a car is to determine how long you plan to keep it. If you plan to keep the car 6 or 7 years, then 60 months is reasonable. If you're a serial car swapper, then you might want to finance over 2-3 years if at all.

As for how much your should spend - that's a personal decision. I cannot tell you how much money I've spent on vehicles in the last 7 years, but I've enjoyed them all and it was worth it (in most cases) to me. When I was a kid, I always saw being an adult and having a job as meaning I could buy cool cars.

C. <-- hasn't grown up yet (next car purchase being planned)

debaser_RENAMED

Just to bring my accounting perspective to the whole question of finance vs. buy outright, which is essentially what's being discussed here.

First, in accounting, there is always an effort to match the payments on a particular item to its use. Therefore, it's somewhat logical to spread out the payments on a car over a long period of time - you won't be driving your TSX for 100,000 miles on the day you buy it, so why pay for all 100,000 miles that day? That being said, this logic is a way to pay lots of finance charges (the only reason someone will lend you money is to make money by doing it!), so it should be taken with a grain of salt. And I've been driving a Vespa for a couple of years to save up to pay for my car in full when I buy one, so I don't practice what I preach!

The original question of this thread though was "how much car is too much car to buy?" That is a blanket question that cannot be answered in its form. It is tantamount to saying "How much is too much to spend on a stereo?" It all depends how important the purchase is to you. Some will have a $30,000 stereo but drive an econobox, cause the stereo's more important to them. Others will pay as much on car payments as on their mortgage/rent, cause the car is more important to them. In my mind, as long as your outflows of cash on a monthly basis are less than your inflows, you can afford your lifestyle, regardless of how much you are spending on each individual item.

KC 2004 TSX

I agree with this statement 100 %. Credit card debt is stupid. Read the book "Rich Dad, Poor Dad" by Robert T. Kiyosaki. It is a great book.

KC 2004 TSX

To give my opinion on this question... I don't think you can ever answer this question. There is no limit to what is too much. Buy what you want.

Crazytree

While Kiyosaki makes some good points... he is generally regarded as a fraud. The childhood and father described in that book is a fabrication. So make sure you take everything he says with a grain of salt. That being said... avoiding CC debt is pretty elementary.

duugk

Spoken like a true car salesman.

KC 2004 TSX

The stories are just that, stories. It's the message that is important. As for him being regarded as a fraud... That has to be the most ignorant statement I've read in a long time. He's well respected in the business ownership world.


I do not sell cars anymore but I still like the humor

Lung Fu Mo Shi

Why make the money if you can't enjoy spending it?

But aside from that, don't go in debt (aside from house and car). That's just 3 levels of evil.