The price for a new car in America has been steadily rising. The average price for a new vehicle has now topped $31,000. Compare this to the average per-capita income in the United States in 2012, just $42,693. As a percentage of salary, that’s 72.6%! Sure, the average income of new car buyers might be higher than the average income nationwide, but without a doubt, it does seem that Americans are spending too much on their cars, given that most experts recommend spending just 30-35% of your salary on a car.
Given that more than 70% of new cars are financed or leased, people tend to look more at their monthly payment than the price of the vehicle as a while. Here too there are ways to determine whether consumers are spending so much, so why not delve into a way to determine if you are about to pay too much for a car?
Are You Paying Too Much for Your Car?
The quickest way to determine if you are paying too much for a car is to look at your debt-to-income (DTI) ratio. DTI is the amount of monthly payments you have compared to your gross (pre-tax) income. DTI includes rent/mortgage, cable, and every recurring bill in between. Lenders have a general rule of thumb that your DTI should not exceed 35 percent when you include the payments on the loan being considered. For example if you make $15 per hour for 40 hours a week you would have a weekly gross of $600 or $2400 per month. Based on that, a lender says your DTI should not exceed $840 a month. Even with an income of 40 grand, you can only commit $1,167 a month to your bills.
Add that to the fact that the payment on a car that cost 30K is around $600 a month for a five year note and you can see how new cars are quickly becoming unaffordable for the average American. A quick and dirty rule of thumb is this: set aside no more than 10% of your gross monthly income for your monthly payment, whether you’re financing or leasing. This will ensure that you don’t overcommit on your payment, and find yourself struggling to make your payment each month. Even a single missed or late payment can wreak havoc on your credit score, so it’s to be avoided at all costs.