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Thursday, April 18, 2013

Financial rule of thumb: cars

In an earlier post, I tried to collect a number of personal finance rules of thumb

There are some rules of thumb in today’s Chicago Tribune about car loans. The article is by Gregory Karp.

Many personal finance experts suggest the 20-4-10 rule. It means you should have a 20 percent down payment on a car loan, borrow for no more than four years and make sure car payments [and car insurance] are no more than 10 percent of your gross income.

Others express it as keeping payments lower than 20 percent of take-home pay.

I can’t really evaluate these rules, since I’ve paid cash for all my cars, and then replenished savings with a fake car payment to myself. But that’s the exception:

"If you have to go past 48 months — and definitely if you have to go past 60 months — to get a monthly payment you can afford, you're spending too much money on that car," [Mike] Sante [managing editor of Chicago-based Interest.com] said. "It should really tell you something as a consumer."

Consumers clearly aren't heeding that advice. Last year, 89 percent of auto loans exceeded the four-year rule, according to Experian Automotive. And the recent trend is toward longer loans. In 2010, about 9 percent of auto loans extended past six years. Last year, that rose to more than 16 percent.

Update

Gregory Karp has another version of this article a few days later, which provides a little longer version and includes car insurance in the 20-4-10 rule.  It also includes this:

The National Foundation for Credit Counseling advice is more strict — suggesting that no more than 20 percent of take-home pay should go to all non-housing debt, including credit card debt. The idea is that the 20 percent for debt plus the 30 percent that often goes toward housing leaves you half your take-home pay to eat, pay utilities, put gas in the car and pay for the rest of life's necessities

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