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Andrew Rivera
Andrew Rivera

How Much Income Do I Need To Buy A Car


As important as your income is, your costs are also part of the equation lenders use to determine how much car you can actually afford. We will overview the terms the lenders use, and we will look closely at the cost side so that you can build up your own accurate budget for your future vehicle purchase.




how much income do i need to buy a car


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When you buy a car, be it new or used, you need money for fuel, money for a down payment, money for insurance, and enough money to pay for the loan you take out. The loan has two parts. First, the interest you will pay on the loan, and second the principal. The principal is the money you owe after the down payment is applied.


How much of your budget should be car-related? Car Talk polled the World Wide Web and created the matrix below for your consideration. Note that these suggested percentages of income are just for the car payment itself. Not the total cost of ownership.


We will keep the math simple for our readers (and ourselves). Here is a quick chart that lists what 15% of various income levels equates to in terms of a car payment. We included a 10% tax hit. You may pay more or less in taxes depending where on the income scale you land, what your deductions are, and if your state has an income tax.


Ford does not include maintenance with its trucks. You will need to budget roughly $200 per year in the first 2 or 3 years of ownership, and about $600 in the 4th year. In year 5, you will need tires. So over the coming 5 years or so, the Ranger will cost you about $3,600 in maintenance and repairs if things all go well. That averages to about $60 per month.


When you apply for an auto loan, lenders are going to use a pair of terms that those buying a car should fully understand. They are your debt to income (DTI) and payment to income (PTI) ratios. Lenders will have a minimum income level below which they will not lend to you. That could be somewhere between $2,000 and $2,500 per month. As you can see from our chart above, that equates to an hourly wage of roughly $15 per hour.


If you would like to calculate your DTI, Wells Fargo has a handy calculator you can use. PTI calculations are a simple ratio. Divide your monthly loan amount by your total monthly income to get the ratio.


These terms are used by your lender to help determine how much they will lend you for a vehicle purchase. We list them here so that if they come up, you will be better educated about the process and hopefully make a good decision.


If you make the median per capita income of about $42,000 a year, for example, you should limit your budget to $4,200. If you make the median household income of about $62,000 a year, don't spend more than $6,200 on a car.


Even so, Experian found that 20% of borrowers are taking out loans of $50,000 or more. That means, median income earners who buy median-priced cars are essentially spending almost 80% of their gross salary.


The more you drive your car, the more expensive it will cost to maintain it. With thousands of parts to each vehicle, something will inevitably break, leak or need upgrading, especially after the warranty runs out.


So in 2003, I sold the car for a $15,000 loss, took over a 1997 Honda Civic from my mom for $7,000 and bought the condo for $580,500. Buying property was the right move; the condo is now worth roughly $1.4 million and provides steady passive rental income for my family.


Another option is to just bite the bullet and sell your car. This is the smartest solution if you spent more than 20% of your gross annual income on a car. (Tip: Try selling it through a free online service. I've bought and sold more than eight cars on Craigslist and have averaged 25% more than I would have gotten at the dealer.)


I often tell people to think of the 1/10th rule as a game. You'll be surprised by how many different types of cars you can choose from using the 1/10th rule. Below are just a few options, depending on your annual income:


Lenders that work with bad credit borrowers want to make sure that you don't go broke paying for a car loan. To do this, they look at your monthly income and monthly bills when considering you for financing. We explore the typical income requirements for a car loan, including the minimum income qualification and the debt to income and payment to income ratio requirements. You should know how these work so you can see for yourself if you have enough available income for an auto loan.


When you finance a car, there's more involved than the numbers on the window sticker. Lenders know that the negotiated price of your vehicle is only the beginning, so they want to make sure you have enough available income to afford an auto loan and successfully pay it off.


When you're taking out a bad credit auto loan, there are certain minimum income requirements you have to meet. This includes a minimum monthly income requirement and acceptable debt-to-income (DTI) and payment-to-income (PTI) ratios.


Generally, subprime lenders require you to make at least $1,500 to $2,500 a month before taxes from a single income source. If you meet this minimum income requirement, lenders then determine if you have enough income to comfortably pay your car loan by calculating your DTI and PTI ratios.


The DTI and PTI ratios are two things that let a lender find a car that fits your budget. Your DTI ratio compares your total pre-tax income to your existing bills, while your PTI ratio lets lenders see how much of your available income would be used for your auto loan and car insurance payments combined.


To calculate your DTI ratio, simply add up all your existing bills and payments, including an estimated car loan and insurance payment, and divide that by your gross monthly income. If you get a percentage less than 45% as your answer, you should be in good shape for an auto loan.


For example, if your existing rent or mortgage, credit cards, bills, loans, car payments, and insurance cost you $850 a month, and your pre-tax monthly income is $2,800 a month, you have a DTI ratio of 30% (850 divided by 2,800 equals 0.30, or 30%), which fits a lender's typical DTI ratio requirement.


To calculate your PTI ratio, add up your estimated auto loan and insurance payments and divide that by your gross monthly income. Keep in mind that lenders estimate your car payment, which you can do with an estimated payment calculator. They also generally use an estimate of $100 as a monthly insurance cost, just to be on the safe side.


For example, let's say your combined auto loan and insurance payment is $400. Divide this by your income of $2,800, and you can see that your monthly car and insurance payment accounts for 14% of your monthly income (400 divided by 2,800 equals 0.14, or 14%).


There's no perfect formula for how much you can afford, but our short answer is that your new-car payment should be no more than 15% of your monthly take-home pay. If you're leasing or buying used, it should be no more than 10%. The reason for finding a vehicle that falls below 10%-15% is that the payment isn't the totality of what you will be spending. You'll need to factor in the costs of fuel and insurance, and many people overlook that. We put those costs at another 7% of your take-home pay. So, all in, you're looking at a total budget that is ideally, no more than 20% of your monthly take-home pay.


Take a few minutes to run down what you spend every month. From your monthly take-home pay, deduct rent or mortgage, bills, groceries, child expenses, savings, and spending on entertainment. You will then discover how much car you can afford.


To make this budgeting less abstract, let's plug in some real-world numbers. The median weekly earnings of a full-time worker in the U.S. was $908 in the second quarter of 2019, according to the U.S. Bureau of Labor and Statistics. This amount translates to an annual income of $47,216.


Paying an estimated 20% in income taxes would translate to a monthly income of about $3,148 for a buyer we'll call John. If we follow our 15% rule, John could handle a monthly car payment of up to $472.


What would the payment look like if John were to buy used? For starters, the sticker price would be lower than on a new vehicle, and there would be a lower threshold of credit needed for financing the auto loan. Assuming again that John goes with the averages, the amount financed for the used vehicle John chose would be $22,623. The down payment would be just over 10% ($2,660). The monthly payment would be $416, and it would take about 68 months to pay it off. The used-car loan would have an interest rate roughly 3 percentage points higher than that of a new-car loan. But that's typical for used-car lending.


But it would take five and a half years to pay off the loan amount, at which point the car would be 8 or 9 years old. How much longer will John want to drive it? It's something to keep in mind when choosing a long loan term because the whole point of financing is to be free of a car payment eventually. And if John buys another SUV as soon as the old one is paid off, John might as well be leasing, so let's look at that.


John's lease payment would be an easier-to-afford $400 per month, or 12.7% of his take-home pay. When we factor in 7% of take-home pay for fuel and insurance costs, John would be spending about $660 per month on this car, which would be about 21% of his monthly income. That's a touch over our recommended 20% for all auto expenses.


In this scenario, John would be paying much less per month to lease than to buy. John would also have a little more in the bank because of the smaller down payment. On the other hand, John would be limited on the number of miles he can drive (without penalty) and would have to start the process over in three years when the lease is up.


The new climate law also added income limits for the tax credit: a maximum of $300,000 for a household, $150,000 for an individual or $225,000 for a head of household. That's a big chunk of change, but because electric vehicles are so expensive, it will disqualify a fair number of buyers. 041b061a72


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