EchoBay Expert: I've fell in love with the new BMW 525 but I don't know if I can afford to buy it. How can I figure out how large of an auto loan I can afford?
Loyal Reader: You have great tastes, but the BMW 525 doesn't come cheap. Say that you pay $44,000 for the car with the options you want, including tax, title, and license fees. If you were to finance it over 60 months at 7 percent interest and you were to put $4,000 down, your monthly payments would be in the ballpark of $811.
Even if you qualified for the low 2.99 percent financing being offered by some of the dealers, your monthly payment would drop to about $718, but that's still quite a hefty payment. The only way to get your car payment to a reasonably low amount would be to put a large down payment towards the purchase price.
You should generally try to keep your car payment to less than 10 percent of your gross monthly income, assuming that your debt-to-income ratio would qualify you for the amount of the auto loan you're applying for. If you earn $2,000 per month, your car payment should be at about $200.00 per month.
On the other hand, if you earn $8,000.00 per month and your debt-to-income ratio is in balance, you can easily afford the $800 per month required to pay off a BMW 525. If you just can't make that kind of payment, you could always wait a couple of years and purchase one second hand after the car has depreciated a bit, making it more affordable.