Income multiples and large purchases

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If my observations are correct, the standard rule for mortgage size is 3x income.

What would you say is the income to car purchase ratio?
 
As I remember it, I think they look at it as more a of a total income committed perspective. They like 80% or maybe a little more, like maybe up to 84%. If you're credit is good and you fall in that category you're good for a major purchase loan.
 
So you're saying someone earning $50k can afford a $40k vehicle?

But what do you think someone should spend as a % of their income?
 
Originally Posted By: Quattro Pete
Once you have enough spare cash so that you can buy the car out right, the ratio to income doesn't really matter, IMO.



Aha but the danger is how you define "spare cash"!
 
Originally Posted By: Sam2000
So you're saying someone earning $50k can afford a $40k vehicle?

If you're trying to determine what kind of a car payment one can sustain, you can't analyze these things in a vacuum. It's one thing if that person has no other debt and obligations. It's another if he's already paying a mortgage, alimony, boat loan, etc.

The monthly payment obviously also depends on the duration of the loan.
 
Originally Posted By: Sam2000
So you're saying someone earning $50k can afford a $40k vehicle?

But what do you think someone should spend as a % of their income?


No, they take you're gross income and use the ratio to compute the total amount of payments for all your loans.
 
Originally Posted By: riff1006
No, they take you're gross income and use the ratio to compute the total amount of payments for all your loans.

So they're perfectly fine with you having only 16% of your income left for other things like food, clothing, utilities, gasoline, personal hygiene, savings, etc.?

No wonder this country is in so much debt.
 
My general rule was to not go OVER 1/2 of my gross income for a car. Try to keep it under. Also, that was my only debt, other than a mortgage. I never had a car loan I didn't pay off early. My last few cars I was able to pay cash for, since I keep the payment amount going into savings even if I don't have a car pymt at the time. Kinda like my play money. Everyone's situation is different, though.
 
If you are asking "should", you are getting into dangerous territory and opinions will vary greatly.

Like it has been said already, it really depends on your overall circumstances and views on money, debt, lifestyle, etc. (so money in general).

I, for one, am a Dave Ramsey devotee and have decided to not use debt as a purchasing instrument for anything but a home, and even then to be very conservative in my house and mortgage choices. Our two vehicles are paid for and their combined value is less than $12k. Dave Ramsey recommends that the combined value of all things motorized be no more than 50% of your annual income because their values are constantly declining. I make more than $100k, so following the letter of that rule, we could have vehicles worth $50k+, but that would be ludicrous in my situation because we do not yet own a home and need to have a lot more in retirement investments before spending anywhere near that much on cars, so I think our current situation is pretty near ideal for us and if one of our cars is totalled or stolen, we will replace it with something of similar value until we are in a financial position to save up for something more expensive.

No matter your personal views or which financial guru you follow (if any at all), it comes down to your financial priorities. Saving up for or financing a vehicle purchase means other financial goals have to take a backseat.

What are you willing to give up or delay?
 
Originally Posted By: riff1006
Looks like I didn't remember it right. And for the OP, at the bottom of this article it answers your question. And you are correct. 3x your yearly income is they figure you can handle.

http://www.practicalmoneyskills.com/personalfinance/creditdebt/debt/load.php


That's sensible, but around here, the results are insane...3rd year out of uni, and banks handing out half a mil in loans

http://www.rba.gov.au/publications/bulletin/2012/dec/pdf/bu-1212-2.pdf

Has the population absolutely beholden to the system and interest rates.
 
Originally Posted By: Silverado12
My general rule was to not go OVER 1/2 of my gross income for a car. Try to keep it under. Also, that was my only debt, other than a mortgage. I never had a car loan I didn't pay off early. My last few cars I was able to pay cash for, since I keep the payment amount going into savings even if I don't have a car pymt at the time. Kinda like my play money. Everyone's situation is different, though.


My experience also; no more than 1/2 my gross salary, ever. YMMV as Silverado said.

I also agree with Quattro Pete...if you make a million a year you might have a bunch of cash lying around and be able to afford the $800,000 supercar. Or if you make 45 million a year you really don't care.

(But as part of the 99%, I do care)
 
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We didn't buy enough house
smile.gif


I guess that makes us bad Americans, LOL.

Originally Posted By: Sam2000
If my observations are correct, the standard rule for mortgage size is 3x income.

What would you say is the income to car purchase ratio?
 
I make about 70K/year and bought a great, old, completely remodeled farm house on 1 acre for $105K. That allows me to drive a new CR-V and a 2012 Golwing, make payments, and stay within the man's limits. Property is pretty cheap here IMO.
 
Originally Posted By: Sam2000
If my observations are correct, the standard rule for mortgage size is 3x income.

What would you say is the income to car purchase ratio?

It's depend on interest rate, with the low interest rate as of the last few years 3x income is good rule of thumb for 30 years fix rate, for 15 years fix rate 2.5x income is a more prudent ratio.
 
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