Originally, Volvo put 195/60-15 (87 load rating) tires on their 240s equipped with these wheels, to replace the 185/70-14 (again, 87 load rating) tire/14-inch wheel of their sedans.
However, don't we all go to Virgos to get a little more rubber on the road? So why stop there. On my wife's '93 240, I put 205/55-15 size tires on Virgo wheels. A 205 tire will fit well, with no concerns about rubbing.
Even on my own '93 with Hydra (16 inch) wheels, I only put 205/55-16 tires.
Another factor to consider about tire size is the effect on the speedometer/odometer, of course. Her 205/55-15 tires give about a 2% over-reading compared to my hand-held GPS, which is fine, so she's got a 1 mph safety margin on the highway when she's speeding. Don't ask about my car's speedo accuracy (it's way off), but I rely on a dash-mounted GPS anyway. I'm assuming, as a regular on this forum, that you already know how to predict a tire's size on your speedo/odo accuracy, right?
But don't be tempted to go too low an aspect ratio (say, 50 or 45 series), though. Not only do you get close to a more vulnerable sidewall (viz., pothole damage), but you also lower the "load rating" of the tires. You never want to install a tire with a lower load rating than the original tire size.
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Sidebar: Load rating is the number next to the speed-rating letter. For instance, you'll see "88W" next to the size -- the "88" is the load rating, while the "W" is the speed rating (don't confuse the two). The 240 sedans originally came with tires that were 87; I think the wagons' 185-14 size had an 89 load rating.
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A 205/55-15 tire like my wife's car has a load rating of 88, which is okay; while a 205/50-15 tire has a load rating of only 86, so that wouldn't be acceptable. By the way, the aforementioned tires on my own car are 91W -- but I like having the greater additional load rating because I tow a couple of my boats with this car.
In my opinion, though, mere size isn't the only factor that maximizes your traction. Also consider the tire's design -- a tire built for higher speeds (with a higher speed rating, such as W), compared to an ordinary tire with an H letter even in a somewhat larger size, will generally provide more grip -- the rubber is that much stickier. Of course, you also have to factor in faster tire wear: W tire wear out faster than H tires, which are harder and therefore wear less but are more slippery (less grip). Harder H tires may also give you slightly greater gas mileage.
The final decision is yours, however, to find the right tradeoff between tire wear, gas mileage, and traction -- but remember that the first two are matters of mere money, while the third factor can be your life (or at least whether your car will be crashed). For me, I put my whole family (except in winter, where we use studded snow tires) on such W tires: my wife, my daughter*, and my own car, all ride on Michelin Pilot Exalto PE2 tires as my current favorite.
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* My daughter recently bought a new '07 S60, so I promptly took her car and swapped out the ordinary OEM 205/55-16 (91H) Michelin MXV4's for 225/50-16 (92W) PE2s. I feel much better knowing she's on those. By the way, these diameter's are the exact same, so no effect on the speedo/odometer.
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Best regards,
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