So, you’ve decided you’re going to get a new car? That’s great!
You’ve also chosen to read this before you charge off into a dealership and make a deal with which you might have difficulty living. That’s even better.
With this in mind, here’s how to figure out if you can afford a car.
Your first step should be to compare how much cash you’re bringing in each month to how much you’re paying out. Make a list of all of your bills, total them up and subtract that sum from your monthly take home pay.
If you caught everything including groceries, clothes, personal care, entertainment and savings, what you have left can probably be comfortably applied to your transportation needs.
Review Your Credit History
You’re entitled to a free copy of your credit report each year. It’s always a good idea to review your credit report before you make a major purchase on credit, so you’ll know your credit score.
The higher the number, the lower the interest rate for which you will qualify. This can make a significant difference when you’re trying to figure out how much you can afford to pay for a car.
A higher interest rate means a higher car payment, which means less car — and vice versa.
There’s a lot more to owning a car than making the monthly payment. You’ll have to cover fuel, maintenance, tires, parking, insurance, registration, driver’s license fees and repairs.
Many of these will vary based upon the type of car you get. After all, a German luxury car will be considerably more expensive to maintain and insure than a Japanese economy car.
According to the American Automobile Association (AAA), small sedans, hybrids, small SUVs and electric vehicles are the least expensive to operate. Trucks, large sedans and midsize SUVs have the highest costs of ownership.
Calculating Your Ideal Car Payment
Most experts recommend spending no more than 30 percent of your monthly take-home for transportation. This means the car payment and associated costs should be less than 30 percent of your monthly spending plan.
Now that you know how much you can afford to pay, you can factor in a number of variables to arrive at your ideal monthly expenditure. These include the length of the car loan you’ll take, the amount of the down payment you have and the interest rate for which your credit score qualifies you.
Here’s where you need to be careful though. It’s pretty easy to get a car payment down into the “affordable” range by extending the length of the loan to 72 or 84 months.
That’s a trap.
You’ll pay a lot more in interest for those longer loans; so, while they look cheaper at face value, you could wind up paying as much as $10,000 more for the car when you factor in all the extra interest payments. You’ll also risk owing more for the car than it is worth.
Additionally, if you take a six- or a seven-year loan, repair costs are going to be much heavier as parts begin to fail. You’ll be paying to fix the car — even while you’re still paying off the loan.
Under no circumstances should you ever finance a car for more than 60 months. Ideally, you’ll keep it to 36 or 48. If this has already happened to you, look into getting an auto loan refinance for a shorter term with a company like RoadLoans.
Calculating an Affordable Loan Amount
You can work backwards to figure out the loan amount you can comfortably support once you know how much of a down payment you can make, how much you can afford to put toward a monthly payment and your credit score.
If you have a trade-in or a car you can sell, this will effectively increase the amount of your down payment. You must also bear in mind the sales tax and fees you’ll pay. In most states, this comes to approximately 10 percent of the purchase price.
Plug these numbers into a good car affordability calculator and you’ll see how much car you can afford. With that number in hand, you can then shop confidently among models in your price range to find the one most pleasing to you.