One of the main expenses most of us have in common is transportation. For many, this could be the use of public transportation like subways, buses, or trains. However, for most of us, our transportation costs mostly revolve around our car.
In an ideal situation, you’d have no loan payment and would essentially only be paying for the costs that come with ownership: registration fees, gas, insurance, etc. Many of us will eventually get to that point, but only after using the vehicle for 4 or 5 years, depending on your financing.
For most of us, flat out owning a car from the get just isn’t feasible. So when looking for a new car, the number one question is always, how much car can I afford? The answer to this question depends on many factors.
What Is Your Current Budget?
When determining how much you can pay for a car, the first place you should look is your current budget. Are you currently paying off a car loan? If not, how much extra money do you have at the end of each month? Will any other expense potentially go up? These are the types of questions you’ll need to ask yourself.
The most important question is how much money you have leftover at the end of each month. This is the absolute limit your new car should cost you. However, that doesn’t mean that’s how much you should aim for. Of course, the goal is to get the best car within your current budget for the best price.
There’s More Than Just Price
There’s more to think about than simply the price of the car you buy when determining how much car you can afford. There are plenty of other expenses that can vary depending on your vehicle after you drive it off the lot.
Insurance can be a considerable cost when it comes to automotive ownership, depending on the type of vehicle you drive. The more the car or truck is worth, the more expensive it is to insure. The are other factors beyond your control that can make it more costly to insure your vehicle. Theft rates, safety ratings, and the cost of potential repairs are just a few. Make you do your research on any potential purchase.
Gas is likely the most expensive ongoing expense for any vehicle. The cost can vary greatly depending on the vehicle. Not only can the MPG differ significantly from vehicle to vehicle, but gas prices can shoot up (or down) at any moment. If you’re driving around a gas guzzler at the wrong time, you can watch a significant portion of your income go right into your gas tank.
Certain cars are more expensive to maintain as well. Tires, brakes, computers, other electronics parts all need to be maintained and replace at one point or another. Is the car company known for making vehicles that last, or do they fall apart at a certain point? The goal should be to own the car for as long as possible to avoid making more vehicle loan payments and putting that money to better use.
In the end, there is no magic number on how much you should spend on your car. However, there are some basic guidelines that can help guide you. It’s well accepted that the actual car payment should be 15% of your take-home pay or less. This number is reduced to 10% if you are leasing a vehicle. The reason for this is the ongoing expenses above. Alone, they can take up 7% of your income. In a perfect world, all your care costs combined should be no more than 20% of your income, but you should aim to keep your costs as low as possible.
Do You Buy New Cars Often?
Something else you’ll need to consider before buying a new car is…yourself. Do you typically get bored with a car and want to get a new one quickly? Or will you be happy driving around in the same vehicle for the next ten to fifteen years? If you will want a new car the second this one is paid off, it might be a good idea to go a bit on the cheaper side. If you’ll hold onto this car payment free for a few years, you might be able to splurge a bit on yourself.
Calculating an Affordable Car Loan
Now that you’ve answered the how much car can I afford question, it’s time to get an idea of how to get to the ideal car loan payment. This will depend on several other factors, including:
Credit Score – Lenders will look at your credit score\credit history to determine how risky you are to give a loan.
Downpayment Size – The larger your downpayment, the less financing you’ll need. It’s always a good idea to be ready with a sizable downpayment to keep the monthly payments to a minimum.
Loan Term – Car loans can typically be anywhere from three to seven-year loans. The longer the loan term, the lower the monthly payments. However, beware that at the same time, the longer the loan term, the more you’ll be paying in interest, meaning the vehicle will cost you that much more in the long term. So don’t simply look at the monthly payments when making your decision.
Buy Used or New – Typically, new car loans have lower interest rates than used auto loans. This is because the loans on new cars tend to be larger. The banks will count on the buyer using longer loans at a lower interest rate, which will cost the buyer more in the long term and put more money in their pockets. A lower interest rate doesn’t automatically mean you’ll pay less in interest.
Trading In Your Current Vehicle – If you plan on trading in your current vehicle, find out how much they would expect to give you for it. Typically, this will be much less than the car is worth on the open market. However, you won’t have to go through the trouble of finding a buyer and doing all the correct paperwork to transfer ownership. You’ll need to determine how much that extra cash is worth to you. If you trade in your vehicle, you can add that to any downpayment you plan to put down upfront.
Before you buy any vehicle, do all the math. What’s better in the short term is typically not better your long-term finances. Paying a little bit more now in a down payment, monthly payments, or interest could save you ten times that down the road. Never let a salesperson pressure you into deciding before you’ve had time to work everything out.
Sticker Price is Just the Beginning
Once you’ve determined how much money you can finance, it’s time to look at vehicle prices. Keep in mind that the sticker price is just the beginning of determining the end price. You can deduct the downpayment and any trade-in value you might get, but there are also additional expenses all auto dealers will tack on.
Taxes and other fees will always be added to the sticker price by a dealership. Some of these are unavoidable, but many times, you can negotiate them off by simply asking or questioning what they are for. Don’t be afraid to do so either. The fees will stay if you don’t ask, but the worst that can happen if you do ask they be taken away is the dealership says no.
Realistically, you should expect to add 10% to any sticker price when it’s all said and done. The higher the car’s base price, the more than 10% will be, which is another good reason to stick with more reliable, less expensive vehicles. Of course, with your negotiations, this could be less, but 10% is a reasonable estimation point for your sales tax, registration fees, plus documentation fees.
Find Different Financing Options
Ok, you’ve found the perfect car, fits right into your budget, and everybody is happy. Now the dealership gives your the loan terms…wait just a minute. This is the age of the internet, you don’t need to settle for the terms the dealership gives you.
There are plenty of options when it comes to getting a car loan. More than likely, the dealership is not giving you the best terms. They could be, but you won’t know unless you shop around. Once you’ve landed on a final price with the dealership, it’s time to find the best deal on a loan as well. Find a good loan calculator online to help you figure out with loan amount, loan rates, and loan payback time frame works best for you.
The Lease Option
If you’ve done all the math and buying a new car is just too expensive, then sometimes leasing is a better option. Yes, in the end, you won’t own the vehicle, but just like anything else, that is not the only factor to consider.
Many times dealerships will offer deals that require little to no downpayment to lease a car. With little to no upfront costs, the monthly lease payments can still be much less than any loan payment you might find.
It’s not ideal, but if your budget simply doesn’t allow for the higher costs of making a car payment, you should explore all options, including lease a vehicle for a few years at a lower price. This can give you time to beef up that savings account and save up the down payment for a new car when the lease is up.
There is a lot to consider when trying to answer the question: How much car can I afford? Before buying a car, take your personal financial situation, plus other factors such as down payments, vehicle trade-in, and others into account. Each can affect vehicle financing and therefore what type of vehicle you should start looking for. Once all the cards are on the table you can start to figure out what will and won’t fit into your budget. Remember to take all factors into account and don’t let anyone rush you into a new car purchase before you are ready. Your budget-friendly dream car is out there, go get it!
Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, playing video games, or just playing around with his kids.