How much is too much to pay each month for your car? Ask Scott Hatfield, a 33-year-old teacher from Indianapolis, and he’ll tell you that a monthly car payment of $450 or less is a doable deal.
Right now, Hatfield pays about $350 a month for his 2002 Toyota Corolla. But he’s guessing that he will pay $400 or $450 a month in two years or so if he buys a new SUV or truck.
He says he can afford it.
He’s single, he doesn’t have children and he has his eye on a macho Dodge Durango or a hip Nissan Murano. Neither will be cheap. The 2005 Nissan Murano SL AWD he was ogling at the 2005 North American International Auto Show in January had a sticker price of $35,240.
Take away the glitz, the glam, the handsome gents and stunning gals chatting up the steel on wheels and what we’re looking at here is another monthly bill.
Industrial-sized bling
Sure, nobody enjoys addressing this point. It’s more fun to get caught up in chrome-clad, supercharged, industrial-size bling.
Even so, you have to ask: How much will this sexy ride cost me?
And how much is too much?
The average monthly payment on a car loan is $416 now – up $100 a month from 10 years ago, says CNW Marketing Research in Bandon, Ore.
“Consumers, in fact, are buying more expensive cars,” said Art Spinella, CNW president.
He said 80 percent of all incentives are now used to buy a pricier car or truck than planned. In 1995, about 43 percent of incentives went toward a plusher ride.
Here’s another shocker: CNW – which tracks consumers as they car shop – has seen consumers end up paying one-third more for a car than they had budgeted when they started shopping.
And many regret it.
Spinella says it’s amazing that consumers can overspend by that much.
Yet, if you’ve been to an auto show – or car shopping lately – you know how easy it is to get toasted on those heated seats.
Charles Bates, 44, of Oak Park, Mich., said he easily could have had a monthly car payment of $700 a month if he bought the Chevy Tahoe he really wanted in 2000.
Bates, who has three children and works for the U.S. Postal Service, ended up with a Chevy Malibu and a $450 monthly payment.
“It’s almost paid for now,” Bates said.
Can you afford it?
Some general guidelines say that car payments should be no more than 5 percent to 10 percent of one’s monthly pretax income. So a household making $50,000 a year might consider a car payment of $208 to $416 a month.
We’re talking very general guidelines here.
If you’ve loaded up on credit-card debt, aren’t saving a dime for retirement or have a bunch of student loans, spending 10 percent could be too much.
Yet people spend that and way more.
“A lot of people are so excited that they qualify to get a car or a loan that they just go ahead and do it without thinking it through,” said Aimee O’Brien, a financial counselor for GreenPath Debt Solutions in Detroit.
Americans spend more of their disposable incomes on cars than virtually anything else except housing, said Kerry Lynch, director of research for the American Institute for Economic Research in Great Barrington, Md.
The institute’s research shows that owning a series of even small cars in the United States could end up costing an average of $240,704 over a driver’s lifetime. Owning SUVs could push the costs to $320,506.
The numbers take into account what consumers pay for insurance, gas, maintenance, repairs, licenses and other items.
But too many people focus only on that monthly payment. And that’s where they can buy trouble.
Leasing is popular, in part, because you often can get more car for a lower monthly payment than if you take out a car loan. The average lease payment is $302 a month.
So-called low-priced leases
“We’re seeing a resurgence in leasing of mainstream cars,” Spinella said. “Nothing works better than a low monthly payment in terms of incentives.”
But Jeff Kaplan, an accountant with Kaplan, Katzman, Klein & Koterba in Farmington Hills, Mich., warned that some consumers aren’t really saving much money with so-called low-priced leases.
“A lease payment is a cheaper monthly alternative in the short term but overall you may not be ahead of the game, if you’re willing and able to keep the car longer.”
Sure, it’s possible to pay $450 a month for a car if you finance it and $250 a month if you lease it, Spinella said. But if the only reason you’re leasing is to get a smaller monthly payment, he said, it’s not terribly bright.
A cheap lease deal may mean that you can’t drive much. Or you have to lease the car for more than three years.
Say a lease contract requires that you’d pay 30 cents extra for each mile you drive over the agreed miles. If you’re 5,000 miles over when the lease ends, you could owe $1,500.
Or if you go with a long lease, say more than 39 months, to get a cheaper monthly payment, you’ll have to cover a bunch of extra costs and repairs, such as buying new tires. And you can’t buy junky tires. The tires you buy have to be of the same quality that were on the car when you lease it.
Stretching the loan
Dwelling only on the monthly payment means that you’re not considering how much a given car – or a string of new cars – can ding you over several years.
And it’s a good way to get taken, said Bob Kurilko, vice president of marketing for Edmunds.com.
The longer you stretch out that loan, the more likely you’ll be upside down on that loan,” said Greg McBride, senior financial analyst for Bankrate.com.
Upside down means that you owe more on the loan than the car is worth.
The term is a “negative equity balance.” It can happen if you make a tiny down payment and take out a long-term loan.
Once you’re in this mess, a way to get out is to keep the old car until you pay off the loan.
But about 28 percent of consumers who trade in a car to buy a new one have negative equity, Kurilko said. On average, they owe $3,800 on that old car.
What do they do? They borrow the money for the new car and roll that old loan into the new loan.
So how much new car can you afford?
Well, it may be less than you think, especially if you owe more on your old car than it’s worth.
“I meet with clients and say, “Your car payment is $600. What do you drive?”‘ O’Brien said.
Their response: “Oh, I drive a Taurus.”
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