How Much Car Can You Really Afford?
Friday, September 20, 2019
Read Time: 4 mins
Is your current vehicle on its last leg, or are you just ready for something new? It’s probably time to consider biting the bullet and getting that new car you’ve been dreaming about. That said, buying a new car isn’t a small purchase. For most of us, it’s second to buying your home.
When you decide to buy a car, one of the questions you ask yourself is, “How much car can I afford?” In order to answer that question, you have to take a look at your budget and find out just how much you can comfortably afford. Also, remember that the type of vehicle you get will affect your monthly expenses.
Find out what payment you can afford.
It’s recommended that you spend no more than 10% of your net-pay (what you take home) on your car payment. Altogether, your car payment and car-related expenses such as gas, insurance, repairs, and maintenance should be no more than 20% of your take-home pay. So for example, if you bring home $1,000, you would be able to afford a $100 car payment.
You also want to be realistic about how long you want to continue to make this monthly payment. Many experts recommend a maximum loan term of 36 months for a used car, and 60 months for new cars.
By opting for a longer loan term, you will reduce your monthly payment. However, you’ll end up paying much more in interest. Also, by taking a longer loan term, you may risk becoming upside-down on the loan, meaning you owe more than the car is worth.
Calculate the loan amount you can afford.
Once you have the payment you can afford, you can calculate how much you could potentially borrow. Some factors to consider are:
- Your credit score. Your score will partially determine what your APR (Annual Percentage Rate) is on your loan. APR is the cost you pay each year to borrow money, including fees, expressed as a percentage.
- Your term, or how long you plan to make payments. There are 48, 60, 72, and in some cases up to 84 month terms.
- Whether you decide to go with a new or used car can have an impact on your APR. New cars tend to have lower APRs but will have higher prices.
Don’t worry. We have a calculator here to help you out.
Set a target purchase price.
The total of the loan you qualify for isn’t necessarily the price of the car you can afford. For instance, if you’re planning on making a down payment or trading in your old car, you may be able to look at a higher-priced car or borrow less money.
There’s also going to be sales tax and fees, so while you’re shopping around be sure to think about more than just the sticker price. A safe estimate is to add 10% to the sticker price of the car for sales tax, registration fees, and documentation fees. For example, if you’re looking at a $20,000 vehicle, it could actually cost you $22,000.
Maintenance fees are another aspect to consider when shopping for a new car. Different types of vehicles will cost you more to maintain.
- Fuel — Depending on your daily drive, the fuel efficiency may be an important factor. If you drive a distance to work, you may want to look at a vehicle with better mileage per gallon, or even a hybrid or electric vehicle. Fueleconomy.gov can help you out with estimating your cars MPG. If you choose a car that takes premium or diesel, it will cost you more at the pump.
- Insurance — There are a series of factors that can have an impact on your insurance such as age, your driving record, and the type of car you own. Your insurance agent should be able to give you an estimate for any vehicle you’re considering. If you’re in the market for insurance, TruStage has options for you.
- Maintenance— This includes things such as oil changes and brake pad replacement. Typically your car’s oil needs to be changed every 5,000 to 7,500 miles. While brake pads typically need to be replaced after 30,000 to 50,000 miles. A typical oil change can range from $20- $55 while a brake replacement can range from $300-$1,000. Prices are dependent on what type of car you have.
- Registration — The DMV can help you estimate how much you can expect to pay in registration fees.
Find your car.
Remember to set the bar low. When you’re looking for cars, set your maximum price below the amount you think you can afford. Sales tax, fees, insurance, and maintenance can potentially add up to an extra few thousand dollars. If you need help getting the process started here is a list of local dealers.
Buying a new or new to you car doesn’t have to be a headache. Remember to take into account more than the sticker price of the vehicle and know your budget. By knowing your budget and what price you can afford, you can save yourself valuable time by only looking at vehicles that you can afford.
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