Before buying a new car, you should first figure out how much you can afford to buy before you start browsing. Going through the advance budgeting process can help narrow your search and prevent an unaffordable purchase.
The average car loan is seventy-two months. That is a long time to struggle with payments too high for your budget. Here are the simple steps to deciding how much a car you can afford.
Don’t forget hidden expenses
A car can cost several thousand dollars more than the sticker price. Before crunching numbers, make sure you’re aware of some hidden costs that need to go into your calculations. Hidden expenses may include:
Fees: Documentation fees and title and registration fees can run a few hundred dollars. If you buy a car online or long-distance, you’ll also have a destination or delivery fee to cover vehicle transportation services.
Sales tax: Determine the auto sales tax in your state and do the math. Some states may have a sales tax as high as 6%.
Insurance and gas increases: Your auto insurance could increase on a newer car, and it might use more gas. You can’t easily estimate these potential costs but should keep them in mind.
Determine your auto budget
Financial experts recommend spending a maximum of 20% of your monthly income on your car, including your loan payment, insurance, gas, and maintenance. Ideally, it should be closer to 10%.
Suppose your annual salary is $60,000. 10% of that $60,000 is $6,000 annually and $500 per month. If you allow as much as 20% of your budget for a vehicle, you’re looking at $12,000 annually and $1,000 monthly. So in terms of your budget, you can allocate $500 to $1,000 to a car.
Remember that this price also includes insurance, gas, and maintenance costs. So if these expenses run you $200 per month, you’re down to $300 to $800 left for the car payment.
Now suppose you get an auto loan for seventy-two months paying $500. Seventy-two car payments at $500 each totals $36,000. Does this mean you can afford a $36,000 vehicle? Perhaps it does if you’re paying cash. However, if you’re financing the vehicle, you also need to account for interest.
Estimate your car loan amount
Using an online car loan calculator, you can figure out how much you can afford to finance. Then, you can adjust the loan terms and amount until you find a number that fits your budget.
If you have a trade-in or down payment, don’t forget to deduct those from the loan amount. The more you can put down, the less you’ll have to borrow and the more car you can afford.
Before buying a new car, shopping around for financing can also help you save. By comparing rates from a few different lenders, you can often save quite a bit in interest.
Wrap Up
Determining how much you can afford before you begin car shopping can save you from overbuying. So it is well worth taking the time to do the math. By doing your homework, you can feel confident knowing you’re driving off the lot with an affordable new ride and not a debt-filled burden.