A lot of financial advisers and loan agents may say that you can afford to spend up to 33 or even 35 percent of your net income towards paying off loans – all types of loans included, that is.
However, that kind of financial planning by Americans is what exactly led us to the credit crisis that we are facing today. Spending more than what one can afford doesn’t help your life at all.
How much car can I afford?
If you are talking about less-risky route, 25% is an ideal figure (in terms of your net income) that you can afford to spend, on all your loans or mortgage together, to be on the safer side.
For example, assume that you have a monthly take home or net salary of $4000.
Your total monthly mortgage outflow in this case would be $1000 or 25 percent of 4000.
This should include your home mortgage, car loan, car insurance premium etc. In this case, how much of it can be on car loan alone?
In the above example, something like $250 or $300 per month is what you can afford to spend on car and related expenses such as car insurance. Obviously, then you need to do your home loan math as well based on the remaining amount which may not be too bad a figure if your spouse is working.
Another question here is how much of your net income you want to spend on monthly transportation (i.e. car loan, car insurance, maintenance and gas)
The answer is ideally 10% of your net income or $400 in the above example. Now you may split that into car loan premium, insurance and gas expenses.
Sounds scary? Aren’t we all spending a little too much on our cars?
Please note that the above figures are for working individuals and the same calculation may not apply to students etc