Car price to income ratio

[Conza]

Ok, for those of us who aren't drug dealers, or movie stars, or whatever you do that would allow you to buy virtually any car without caring if you had enough to make the mortage/rent payments, is there a rule of thumb for new cars to income?

Let's say I wanted to get the new Toyota GT 86, in Australia I have a hunch for it to sell well, it should start at 40k, be about 45ish after bells, so if I made 100 grand a year, surely that would be enough, but what if the ratio were 1:1 (I don't earn 45, but in this scenario lets pretend someone does), is that a correct minimum ratio?

I know what some of you are thinking 'well I have kids, some may not' 'I have a boat some may not' everyones different, but still, all things being equal, is there a general rule? Would be interesting to know if there is, especially good to hear from people who recently bought a new car, what price they were willing to spend and why (perhaps based on income if you're so inclined).

 

[Famine]

The first rule is "never buy a new car". Even with delivery mileage only, prices take a significant hit (20% or so, unless the car is very rare or sought after with a waiting list). That aside, most private new car sales are on finance rather than cash. I also cannot imagine anyone buying a car that would cost them a full year of their life to purchase.

Since I'd never, ever buy a new car or get finance for a car, anything else I'd have to say would be irrelevant.

 

[Ibonibo]

^I think the same thing about second hands one, but the joy of having a brand new car and none of the risks of a used car is quite nice too (but well you pay a good surplus for those qualities)

Cash or finance.
Well if you pay in cash that means that you obviously have at minimum of the said price in your wallet.
If you pay cash I would say that you need at least to have 2x - 3x times the said price on your account (also depending on your life situation).

On finance :

Private person should never lease a car, it is only economical viable for companies.

On credit : Look for the best credit (banks not in garages, they often have complicated and bad conditions), and then it depends on your income:
Income 2 times the car price:
Have at least 1/3 of the car price in liquid on your account

Income is same as car price:
Have at least 2/3 of the car price.

This all depends also on how long the credit goes,...

If income is 1:1, a bank will be very hard on your proper havings (at least 2/3) and it is quite clear that it is not the best solution for a person (which the bank doesn't care that much)

If your income is over the car price, banks generally require you to have at least 1/3 of the car price as security

 

[Smallhorses]

There's no "correct minimum ratio" unless we know what your other hypothetical expenditures are too in addition to your hypothetical salary and hypothetical purchase.

Let's say you do make 100K per year. Let's also say you've also got a 400K, 30 yr mortgage, not to mention bills such as property tax, electric/gas, phone/dsl, utilities (water, garbage), medical insurance, etc.
What you've then got to ask yourself, with what's left over, is "Can I afford a brand new 45K car?", this should come secondarily to "Am I contributing to a pension scheme?", "Am I saving anything at all?", "Can I also afford insurance & running costs on said new car, plus the depreciation hit it'll certainly take the moment your wheels touch the road outside the dealer lot?", "What happens if I suddenly lose my job?" and the biggie... "Can I afford to eat and enjoy life on what's left over?"
If the answer to the latter is yes, then hell, why not?, but it's not usually that cut'n'dried, so we can't answer that question accurately for you without some non-hypothetical facts, so the ultimate decision, based on what you know about this, but we don't, is yours.
Asking us to judge what's a good ratio on the basis of earnings versus car price, without any other facts in hand is just silly.

I'd agree with Famine's assessment that buying a brand new car is silly too, and I've stood by that with every purchase I've made. I have, however, financed a few cars (still have 2 of them, paid off completely), but purely for the gain in credit rating that paying off a loan gave me, and never in any doubt as to my ability to pay the thing off immediately. I did "technically" break that rule this summer, as we bought the wife a brand-new Fiat 500, however, in the final analysis, her credit history is better than mine (due to less time here and less applications!), and thus the loan for the remaining 1/3rd of the purchase price is in her name, and again to build her own credit history, so it's not therefore "technically" my purchase!

Unless you're in the financial wonderland that allows you to compete in the Collector Car market, where you may actually (though not guaranteed, see 1990s collapse!) make a profit on your investment, most car purchases used or new (though new is usually even worse) are a losing proposition and not worth betting on.

 

[Max_DC]

Well as it's been said it all depends on your circumstances.
If you are young, have a save job ( for example we have no hire&fire in Germany if you work for the state / goverment etc so those jobs are dead safe, same goes for large companies like Siemens, BMW etc, they can't fire you unless you steel or kill somebody etc; well and some jobs are so rare that unemployment is a theory ), have no kids etc I don't see a reason not so spend 100% or more of your net income as long you can afford it.
If the car itself is fully insured you could still sell it if you can't afford it anymore ( or you get the money if you crash it ), even if you should lose some money, you still get out of there in worst case.
Basically I'd have a look at your income and what you can save at the end of the year. Let's say you earn 3000 $ a month and you can save 1500 $ per month, that's 18000 a year. Take off insurence, maintenance, gas etc, for example 2k$ each you have 12k left.
So you could invest 10000$ a year in financing your car.
So you could buy a 4 year old car for 50000$ within 4 years.
So, spending 50k$ on a car with a net income of 36k$ works out.

I mean, sure, in this calculation you are basically living for your car, so you really have to want it bad, but it certainly is possible and not too risky. Well, at least if the car is insured, you have a safe job and no family

 

[Murcie_LP640]

Using myself as an example, I'm currently saving money and looking for a newer car to replace the Accord I have at the moment. The plan that I'm going with is, as opposed to financing or a personal loan, setting aside weekly payments into an online saver account which credits interest rather than having for me to pay interest on said personal loan, for an example.

Now, I currently have a very secure but not really well paying job, and I'm currently on about $21k a year. My goal is that by the start of December this year I'll have at least half that ($10,500) to put towards the newer car (in my case I have my heart set on an S15 Spec R 200SX or, as I'm likely to get more than the $10,500 up, an S2000) plus whatever I can get from selling the Accord I currently own.

A 1:1 ratio of course wouldn't suffice because you'd be putting every single cent you earn into a car payment and nothing towards living expenses. Half-n-Half, depending on how much your living expenses are plus potential maintenance/running costs of the car, would probably be ideal.

This is more to do with my income rather than personal selection, but I've never bought a new car. In fact the only new car a family member has bought was my dad's Honda Accord Euro back in 2009. Even then it was a 2008-plate. As much as the "new car smell" means to some people, personally I've never seen it as that much of a deal maker or breaker. For the same money as a $40k new car you can get a car that's a couple of years old, still has warranty left on it and has already had some big depreciation hits, but has very few kms on the clock and potentially more kit. Mind you I reckon the GT 86/BR-Z will be well worth its asking price but you're going to lose a couple of grand as soon as the rubber meets the road (even considering Subaru's insanely robust resale value here). It's definitely something to take into consideration.

 

[Jubby]

As some have said; it's personal budget. You'd have to factor mortgage/rent, student loans(if any), utilities, etc. Do you have room for all of the costs and have enough left over "just in case" things happen? It may be better to try and keep your costs as "fixed" and predicable as possible.

I will make a large pretext to my post; I am not very good mechanically. I can do basic things like change spark plugs, check levels, fill fluids, and so on... but I am not equipped at home (yet) to lift the car for oil changes, tire rotations, etc. I have a professional do most of the work. This idea probably only works when financing cars... buying lightly used with cash would be totally different, I admit.

My last 2 cars have been purchased new. I cannot justify buying a 2-3 year old car with 40-50k miles on it for about 2/3 the new car price... here's why:

The most effective, lowest maintenance cost time of a car is usually between 0-60,000 miles... then 60,000-125,000. Of my two new cars, aside from the finance and insurance costs, I spend virtually nothing extra. If I needed to fix/change anything, it was because I wore it out or it was covered by the warranty. This is helped by car choice (I usually choose well priced subcompact-smaller mid-size cars), low insurance costs, and good credit. For a brand new car I spend about $325 per month all told, maintenance aside. So for my 2 cars I spend around $8,000 per year including basic maintenance.

How does this compare? When my older car was all paid off(for quite a few years by the way), had 150,000mi+, and she needed some attention because of age, I was going to need to spend $3000 to have it fixed up (rust, minor parts going, etc.). Then the transmission went. I was attached to it, and got it fixed for a fairly inexpensive price. This also happened to another older car that I wasn't attached to prior. I could have spent $2,000-$5,000 per year on each car. I couldn't set the price to a "fixed" price. It may have been cheaper, had I been more mechanically inclined and in a better position to do work at home.

So, when you buy a 3 year old car with 40-60k miles on it, you have effectively reached 40+% of it's useful life with only minor maintenance and you still need to spend around the same amount of money per month as a newer car.

I suppose the bottom line to my experience: pay the financed car off before 100,000 miles. Buying a new car makes it easier, a 2-3 year old car makes it harder. At least this way you can plan your budget better as the costs are fairly fixed and predicable. You then have the choice of riding in the paid off car until the repairs rise, or just repeating the process, if you can afford it. The older clinkers cannot be counted on for what goes and when.

 

[Kylehnat]

Some good input here already! (I don't agree with the "never buy new" argument, but that's a discussion for another day ).

My succinct advice is this: if you think you can afford it, you can't. You have to KNOW that you can afford it.

Crunch the numbers: loan payment, insurance, maintenance, fuel, etc--all of which are easy to figure out--and look at that monthly or yearly number. If you don't even blink, you're probably okay. If you're sitting there figuring that you can survive without hot water or electricity, it's probably best to scrap that idea . My personal experience is that without a wife or kids, the "comfortable" income/car ratio is 2:1. If you earn $100,000/year, you can probably finance and maintain a $50,000 car without having to worry about it too much. If you have any dependents, start lowering that bar .

Me personally, I look at how much I can save annually, and I have a minimum number that I'm comfortable with. That's the money I use to go on vacation, improve the house, or deal with unexpected crap. If a major purchase cuts too deeply into that, I won't do it.

 

[Famine]

I cannot justify buying a 2-3 year old car with 40-50k miles on it for about 2/3 the new car price...

At that age and distance, it'd have to be a special car not to be less than half of its new value. On average (with average miles of 12k a year), a 3 year old car is worth 40% of its value when it rolled out of the factory. You can save 20% off the as-new sticker price if it has delivery mileage (less than 100 miles) on it...

So for my 2 cars I spend around $8,000 per year including basic maintenance.

Holy crap, that's outrageous! We haven't spent anywhere close to that including buying the car in the two years we've had our 13 year old, 165,000 mile BMW shed series. That's maintenance, winter tyres, licence, insurance... In fact even including the fuel we've put into it, even at inflated UK gas prices (of just about $7.50/US gallon).

$4k outlay per car per year? Wow.

 

[Jubby]

At that age and distance, it'd have to be a special car not to be less than half of its new value. On average (with average miles of 12k a year), a 3 year old car is worth 40% of its value when it rolled out of the factory. You can save 20% off the as-new sticker price if it has delivery mileage (less than 100 miles) on it...

They're all "special" here in America, apparently. One example: 2009 Ford Focus that stickered for $18k was being sold for just under $12k with 60k miles. Another: A 2007 Mercury Milan originally stickered for $25k with 110k on it books for $12k. A 2008 Hyundai Accent purchased for $12,500 can be resold with 70k miles for $7,500. That's just a tip of the iceberg. Hell, my brand new car bought within the last year only lost 6% of the book value.

Holy crap, that's outrageous! We haven't spent anywhere close to that including buying the car in the two years we've had our 13 year old, 165,000 mile BMW shed series. That's maintenance, winter tyres, licence, insurance... In fact even including the fuel we've put into it, even at inflated UK gas prices (of just about $7.50/US gallon).

$4k outlay per car per year? Wow.

You know I'm including the car payments as they're both financed... right? I don't know many ways (other than a huge down payment)that someone would spend less than $2,500 per year on a new car loan.

It seems that in the US, you can either buy a very old "beater" (7-15+ years old, over 125,000 miles) and either be good at repairs, or pray it doesn't break down. Or, you have to pay the outrageous prices above if you don't buy private. I've been burnt, and know far too many people that have been burnt trying to buy the "beaters". They're money pits here in the states. There doesn't seem to be the "in between" as they demolished a lot of the used cars in the cash-for-clunkers program.

 

[Famine]

They're all "special" here in America, apparently. One example: 2009 Ford Focus that stickered for $18k was being sold for just under $12k with 60k miles. Another: A 2007 Mercury Milan originally stickered for $25k with 110k on it books for $12k. A 2008 Hyundai Accent purchased for $12,500 can be resold with 70k miles for $7,500. That's just a tip of the iceberg. Hell, my brand new car bought within the last year only lost 6% of the book value.

Jebus!

What's the matter with your used car market? Has the arse fallen out of it or something? Normally you lose 30% of the value of your new car in the UK as soon as your name gets put on the registration certificate (regardless of mileage)* and most lose half of their remaining value by 3 years (if running average miles). Gets a bit odd at that point, depending on the car, but the shed on my drive was a £40k car new and a £1k car at eleven years of average miles. That's a fairly typical rate of depreciation - there's not much over ten years old than is worth more than £3k. There are exceptions, where demand is high or there's a waiting list - FIAT 500s and MINIs are pretty much the commonest exceptions.

*And for that reason I would never, ever buy a new car in the UK. Give me a car with delivery miles and I save 30% over what the first guy paid - which is a lot of tyres and gas, even on a £10k car.

You know I'm including the car payments as they're both financed... right? I don't know many ways (other than a huge down payment)that someone would spend less than $2,500 per year on a new car loan.

Yeah, and that's the point.

Our shed (you'd class it as a beater - 11 years old and, I think, 158,000 miles when we got it) has cost a grand total of £300 in necessary maintenance (brakes - I spent an extra £30 upgrading them from OEM parts) and another £80 in a set of winter tyres. We're thinking about buying a less rusty tailgate from a scrappy for a tenner and I'm considering replacing the front suspension bushings on both sides for about £30. We bought it outright for £1,077 in July 2010 and it's still worth that now. If scrapped it's worth about £200. It's cost £320 to insure for a year, twice, and £155 to tax for a year, twice. So over its life with us so far it's cost us £110 a month (excluding fuel - about 320 gallons at about £2,000 total) if you assume it only has scrap value or £60 a month if you assume we can sell it for the £1,000 we paid - this cost gets lower every month we own it. We haven't given anyone any money in finance and we haven't lost a penny off the value of the car we bought.

Had I bought a new BMW equivalent, I'd be eating soil every night instead of food and giving a finance company £600 a month and I'd still have the same major costs anyway (fuel, consummables, tax, insurance) - but at least I wouldn't have to worry about my car breaking down except the days of inconvenience when it does and the dealership take it in for repairs and give me a joke "courtesy" car. Which I don't worry about anyway, because it'll go to the scrappy and we'll buy another one with the £500 a month we're saving (so it'd just take two months of ownership to "break even") over not having "bought" a new car...

Remember, when you reach my age, a decade old car is still younger than your driving licence - only one of the cars I've owned in the last ten years was even on the roads when I passed my test. These things are newer than our ability to drive is! Four years after I passed my test, some guy went into a BMW dealership and specced up a green 5-series Touring (he didn't spec it up all that well - it's a 2.5 with a cassette player, and keep-fit cloth seats) and dropped £38k on it, possibly through finance while I was hacking a Fiesta about the countryside. Two years ago I bought the same car for 3% of what he paid and it's owing money to no-one...

There doesn't seem to be the "in between" as they demolished a lot of the used cars in the cash-for-clunkers program.

We lost a whole host of cars in a similar scheme. There's going to be a bit of an issue with older used cars this year after changes to the requirements for the annual roadworthiness test - though it remains to be seen whether it'll be an overproliferation (due to cars being ditched for piddling failures) or a shortage (due to cars being scrapped and replacements in demand).


If I ever bought a new car, it would literally have to be my dream car. Since my dream car is 25 years old, there's little chance of that

 

[Jubby]

In theory, I totally agree with your personal use of cars, Famine. Your 'shed' seems to be worth it. I almost wish, in my area, that'd be worth it. I would need 3 things to pull it off:

1) The ability to find $1,000 cars that don't need over $1,000 of repairs. For something not needing that large amount of repairs, in my experience, you have to spend up and beyond $3,000. A side note on why they need repairs as much, the state that I live in requires an inspection sticker. (If you want to know more, just ask)

2) I'd personally need some better automotive skills... I assume you do, so good on ya.

and 3) Fellow drivers who didn't beat the living 🤬 out of their cars. Most get them, beat them up, then trash them. The infrastructure (roads) here don't help either. Even the best made frame starts to resemble a Lancia from the 70's due to the extensive need for road salt/sand after 10-15 years. The practical time frame for everyday cars seems to be 10-12 years without major repairs. Most cars need minor under body work within 8-10 years.

My late grandfather had a 1984 Pontiac Bonneville in 2001 with 225,000 miles. It was awesome. He took care of it like no one I knew. He needed to shell out $3,000 for frame work. That must be what you normally spend in 2 years!

I've really crunched the numbers on this for where I am, and I like your style... but I'm afraid it isn't practical where I am. Maybe I should move!

 

[dsgerbc]

While I generally understand the premise of buying used, anyone who's gonna be buying MY08-11 used cars in the next few years is gonna be overpaying by a large margin. Recession worldwide lowered production of new cars, so now, as they come on to the used car market, there are too few of them. So if you normally buy used, this time around - don't.