As the weather heats up, so does action on car dealer lots and showroom floors. Many American consumers will be trying to reconcile their bank account balances with that delightful new-car smell, asking, “How much car can I afford?” Here are a few rules of the road:
BORROW FOR FOUR YEARS OR LESS: Money guru Clark Howard, who doles out advice on radio and television, has long advocated not taking out a loan longer than 42 months, or 3.5 years. “If your payment is too much at 42 months, that means you’re buying too much car,” he has said. Instead of financing for a longer period to reduce monthly payments, get a small payment by purchasing a less-expensive car. That might mean buying your favored vehicle as a 2- or 3-year-old used car instead of new.
KEEP PAYMENTS TO 20 PERCENT OF TAKE-HOME PAY: To determine how much car debt you can absorb, ideally you would do in-depth analysis of your finances. But as a rule of thumb, keep the total of all vehicle payments to less than 20 percent of take-home pay, not gross pay.
20/4/10 RULE.This combines several rules, referring to a 20 percent down payment, a loan term of four years or less and payments plus auto insurance not to exceed 10 percent of gross income. This rule is expressed differently than the 20 percent of take-home pay above by referring to gross income and including car payments plus auto insurance. Gregory Karp, The Chicago Tribune
