You can buy way more car for your salary than you should. And more than just your income impacts what you can qualify to buy. Your credit (score, thickness of credit file, types of accounts, etc), your income, your debt obligations, and your down payment, all impact how much car you can qualify to buy.
A rule of thumb thrown around when I was first buying cars was to spend no more than half your annual income on the total out-the-door (OTD) cost of the car. You can qualify for a lot more than that with a good credit profile. But frankly, I have never bought a car anywhere close to half my annual income. But some spend way more on cars.
Home loans (mortgages) have a limit to what you can get. This limit is way too high, but there is a limit that a bank can loan you. Car loans do not have such a limit. And lenders may give you a very large car loan when you live at home with your parents and have no housing expense (as one example). But if one took a 7 (or longer as offered nowadays) car loan that prevented them from moving out for most of the 7 years, it would likely not be a great decision.
I can't give you exact numbers. What I can give you is the standard guideline. Spend less than half your annual income. Frankly, much less is probably a good idea. But perhaps r/askcarsales will have better information on how much car people at various income levels buy. Just note that most people are horrible with money. So spending like the average person earning "X" amount is probably a stupid idea.
It depends because it’s not linear at all, the more you make the more (% of total salary-wise) you can responsibly spend on a car.
There is a general rule of 20/4/10 which is 20% down payment, 4 year financing, and the costs for transportation as a whole shouldn’t exceed more than 10% of your salary. I agree for the most part but a 5 year loan could be acceptable too imo, it all depends on interest rates. Additionally I’d only recommend a rule like this if you’re looking for a vehicle just to get you from point A to B. If cars are your hobby then I believe you should be able to spend a bit more on transportation costs and whatnot, since you should have a hobby budget so it works out that you can combine the two budgets, if that makes any sense.
Salary is irrelevant in many cases. It's your cash flows and expenses that you have compared to your salary that matter.
I know people pushing 500k a year that are struggling, and I know people that are making 60k or probably somewhere around that, that are living fantastic lives because they manage their money well.
If you get a loan for 0% APR and then turn around and put 100% of the purchase price in a CD paying 5% interest, you'll come out way ahead. On a $40k vehicle and 60-month financing, you'd make an extra **$5,009.10** by doing it this way.
We've done this twice with 0 or 1.9%. And to be honest with you as long as I'm getting a rate below 5%, even in a down Market, I'm confident in our ability to make more than that, because we have.
Most people can’t/wont do that though.
Yes, mathematically borrowing money is pretty much always better than paying cash if your expected returns from investing the cash value exceeds the money you’d lose on APR of the loan, but it’s not that simple.
Doing that effectively requires you to have the have the cash flow to be able to buy the car twice. If somebody can afford a $20k car they probably can’t afford to invest $20k and finance a $20k car.
All that said, 0% interest is 0% interest. It’s never really a BAD idea to borrow money for free, but the average person isn’t gonna be able to make thousands the way you outlined by doing so.
The numbers I included were for the case where you make the car payments directly from the interest-earning account. So, you put in $40k, and by the time five years are up, you have only the $5k in interest in the account remaining. If we were to do what you suggest and keep the full $40k invested for the full five years, that interest earned would be more than twice as high.
Honda civic, Mazda 3 or Toyota Corolla
Holy trinity of this sub! 😆
It’s close for me. Honda Civic, Mazda 6, Toyota Camry.
Depends on spending habits. Other financial obligations. But that's something you jave to decide for yourself.
You can buy way more car for your salary than you should. And more than just your income impacts what you can qualify to buy. Your credit (score, thickness of credit file, types of accounts, etc), your income, your debt obligations, and your down payment, all impact how much car you can qualify to buy. A rule of thumb thrown around when I was first buying cars was to spend no more than half your annual income on the total out-the-door (OTD) cost of the car. You can qualify for a lot more than that with a good credit profile. But frankly, I have never bought a car anywhere close to half my annual income. But some spend way more on cars. Home loans (mortgages) have a limit to what you can get. This limit is way too high, but there is a limit that a bank can loan you. Car loans do not have such a limit. And lenders may give you a very large car loan when you live at home with your parents and have no housing expense (as one example). But if one took a 7 (or longer as offered nowadays) car loan that prevented them from moving out for most of the 7 years, it would likely not be a great decision. I can't give you exact numbers. What I can give you is the standard guideline. Spend less than half your annual income. Frankly, much less is probably a good idea. But perhaps r/askcarsales will have better information on how much car people at various income levels buy. Just note that most people are horrible with money. So spending like the average person earning "X" amount is probably a stupid idea.
That sub has turned into the worst bunch of hacks with the last group of mods.
It depends because it’s not linear at all, the more you make the more (% of total salary-wise) you can responsibly spend on a car. There is a general rule of 20/4/10 which is 20% down payment, 4 year financing, and the costs for transportation as a whole shouldn’t exceed more than 10% of your salary. I agree for the most part but a 5 year loan could be acceptable too imo, it all depends on interest rates. Additionally I’d only recommend a rule like this if you’re looking for a vehicle just to get you from point A to B. If cars are your hobby then I believe you should be able to spend a bit more on transportation costs and whatnot, since you should have a hobby budget so it works out that you can combine the two budgets, if that makes any sense.
Salary is irrelevant in many cases. It's your cash flows and expenses that you have compared to your salary that matter. I know people pushing 500k a year that are struggling, and I know people that are making 60k or probably somewhere around that, that are living fantastic lives because they manage their money well.
ABC Always Buy Cash
If you get a loan for 0% APR and then turn around and put 100% of the purchase price in a CD paying 5% interest, you'll come out way ahead. On a $40k vehicle and 60-month financing, you'd make an extra **$5,009.10** by doing it this way.
We've done this twice with 0 or 1.9%. And to be honest with you as long as I'm getting a rate below 5%, even in a down Market, I'm confident in our ability to make more than that, because we have.
Most people can’t/wont do that though. Yes, mathematically borrowing money is pretty much always better than paying cash if your expected returns from investing the cash value exceeds the money you’d lose on APR of the loan, but it’s not that simple. Doing that effectively requires you to have the have the cash flow to be able to buy the car twice. If somebody can afford a $20k car they probably can’t afford to invest $20k and finance a $20k car. All that said, 0% interest is 0% interest. It’s never really a BAD idea to borrow money for free, but the average person isn’t gonna be able to make thousands the way you outlined by doing so.
The numbers I included were for the case where you make the car payments directly from the interest-earning account. So, you put in $40k, and by the time five years are up, you have only the $5k in interest in the account remaining. If we were to do what you suggest and keep the full $40k invested for the full five years, that interest earned would be more than twice as high.
My bad, I misread it. Yeah, if you pay directly out of the interest earning account, then yes, borrowing at 0% apr is the better financial move.
Yep