Calculate A Car Loan Amount You Can Afford
After you have figured out the amount you can comfortably spend for a car and related expenses each month, you must determine how much you want to borrow. That figure is affected by several factors related to APR and the length of the loan.
- . Borrowers with higher credit scores generally qualify for lower interest rates because lenders see those customers as less of a risk.
- Loan terms. The number of months you have to repay the money affects your monthly payment. Shorter loan terms create a higher monthly payment. Longer loan lengths bring lower monthly car payments, but that means youll pay more in interest over the life of the loan. In general, aim for a 48-month loan.
- New or used car. New car loans typically have more favorable interest rates compared to whats available for used vehicles.
Dont Be Afraid To Walk Away
If the price is too steep, the loan terms arent great, or that little voice in your head tells you the purchase is a bad idea, dont be afraid to tell the seller you need time to think about it or to walk away entirely. Many times, stubborn sellers will lower their absolute bottom-dollar price while you are on your way out the door if they need to make the sale. Even if you pass on a great deal on a car you love, rest assured that there are plenty of other opportunities and you will certainly find other great deals.
Shopping For Car Insurance
Keeping your monthly car payments under 15% will keep you from feeling stretched or financially strained. Below are some of the best car insurance in the market.
Gabi Gabi reports that its customers save an average of $961 per year on insurance. All you have to do is go to their site, provide a PDF link of your existing insurance policy and the platform will search for a great deal for you.
Liberty mutual This is a great option for those with multiple insurance. Liberty will help you bundle your auto policy with your other insurance types. Also, you can easily get a quote from their site.
Allstate Allstate has a strong reputation of being the best auto insurance company. The company has its agents everywhere, and offers discounts to teen drivers. This company is a great option for drivers who often move around.
Amica Mutual Amica is one of our personal favorites. The company ranked #1 in J.D. Powers 2020 U.S. Auto Insurance Study In New England and as a top provider in J.D. Powers 2020 U.S. Auto Claims Satisfaction Study. Although their coverage is not the cheapest out there, they have great services and ranks highly in almost every category.
Eerie Insurance Eerie is ideal for young drivers as they offer good rates.
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Dont Get Caught Up With Car Envy
No matter how much you know about buying a car that is affordable, one thing is for certain
If you are buying your next car to impress others you will most likely go over budget in just about every area.
Whether it is the premium fuel luxury cars require, the costly insurance or the higher costs to change tires and get the oil changed impressive cars simply cost more!
A simple Google search of the most expensive cars to maintain will bring up all the popular luxury car brands.
Keep in mind that it is just a car and by keeping your car expenses low you can do other things like pay off student loans, save for retirement or purchase a home!
What Is The Average Car Payment
As of 2018, the average car payment for a new car was $554 and the average for a used car was $391. Those averages reflect not only a variety of sticker prices, but a wide range of down payments, loan terms, interest rates, and more. Your monthly payment may be higher or lower, depending on your loan terms. Making sure the payment fits into your budget is much more important than the dollar amount you spend each month.
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The Term Of Your Car Loan Should Be No More Than Four Years
The longer the term of your loan, the more interest you pay. The longer your loan term, the longer youll have to meet your lenders insurance requirements, which often means higher rates.
Plus, by the end of four years, your car will have lost a lot of its value, and you wont want to still be paying it off.
Four years is the maximum most personal finance experts recommend. If you can swing paying off your car in three years, thats even better. If you feel you absolutely must stretch your payments further, you could get a five-year loan, but never longer.
Your Monthly Payments Should Be Less Than 10
To get the best car you can realistically afford given your salary, we recommend your monthly payment should be less than 10-15% of your earnings after taxes . If you dont know this number off hand, you can calculate it using neuvoos Canadian income tax calculator.
Lets walk you through some examples.
Say you make $45,000 gross per year and you live in Manitoba. Your yearly net pay after tax deductions comes to roughly $33,843. This is your take-home pay.
15% of your total take-home pay comes to $5,076.45, which equals $423.04 per month. This means if you make $45,000 a year, you can spend around $423 per month on car payments. Keep in mind, this doesnt include a down payment and if you had one, that number would change. That 15% also doesnt include car insurance, gas or routine maintenance. This is where the 20% rule comes into play.
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Takeaway On The 10% Rule:
Always follow the 25% gross rule when purchasing a new car and your car payment should fall in line with how much car you can afford!
As you can see in the chart above if Jenny buys the car valued at 45% of her annual income, she would ultimately overspend each month after gas, insurance, and any maintenance.
So while she might be able to Afford the higher valued car, after all the expenses associated with her car, she should be conservative when pricing a car.
How Much Car Can You Afford
Many financial experts recommend spending no more than 10%-20% of your take-home pay on car expenses. A good rule of thumb would be 10-15% of your monthly take-home pay for your car payment, and the rest on ownership costs like those outlined below:
- Auto Insurance: According to a NerdWallet analysis, in 2021 the national average cost to insure a vehicle is $1,592 a year, but that could vary widely on many factors.
- Repairs, Including Tires
- Transportation Costs Like Tolls, Parking
- Licensing/Registration/Taxes as regulated by your state
The 10-20% strategy won’t work for every budget, so it’s important to study your own finances carefully and come up with the figure that works best for you.
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New Cars Depreciate Extremely Fast
New cars lose 60% of their value in the first four years, and 20% of that is in the first 12 months.
That means if you buy a brand new car for $35,000, after a year its only worth $28,000 on average. After four years, its worth just $14,000. This makes a strong case for buying a used vehicle not only because you can get a comparable model for a lower price, but this also prevents you from becoming underwater with your car loan.
An underwater loan is a situation that arises when someone buys that new $35,000 car, then a year later they want to sell it. The only problem is that the no-longer-new car is only worth $28,000, but they may still owe $29,700 on it.
The loan balance is greater than what the car is worth, so this car owner would have to shell out an extra $1,000 just to sell the car.
Calculate An Auto Budget You Can Afford
A car payment is just one item in your total monthly spending. Start with your monthly income after taxes. Then subtract each of your recurring expenses, which may include:
- Childcare expenses
- Savings contributions
Some personal finance experts recommend your auto budget costs comprise around 10% of your monthly net income. One common suggestion is a 20/4/10 rule of thumb to help determine your automotive budget:
- Put down 20% of the vehicles price.
- Finance the purchase for no more than four years.
- Keep transportation costs around 10% of your monthly income.
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After Negotiating Read The Paperwork
You have done the hard workresearched, haggled and agreed on a price. Now it is time to sign paperwork to complete the purchase. Remain vigilant before signing the paperwork and be sure not to skip the sales contracts fine print for any fees and hidden costs. The dealer may attempt to throw in extrasusually unnecessary add-onssuch as extended warranties, gap insurance and tire protection.
Given how much it costs to buy a car, the last thing you want to do is pay even more for add-ons, if you dont need them.
Dont be afraid to ask a lot of questions and for the dealership to remove any unwanted extras.
What’s The Best Option
There’s a case to be made for each of these approaches to affordability. It is essential to recognize your car-buying history, and if you do commit to a long-term loan, make sure you drive the vehicle for at least a few years after it is paid off.
In the end, the best car-buying scenario will be one that takes into account your bills and other financial responsibilities. Don’t shop for a car at the top of your budget. And if it’s a stretch for you to buy now, consider saving up a bit more and revisit shopping at a better time. The most important things are to know your budget and remember that there’s more to owning a car than just that monthly payment.
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Use The Car Affordability Calculator
A car affordability calculator helps you figure out how much car you can afford, whether you are paying cash or financing. We recommend that you use the Fidelity or the Edmunds car affordability calculator to figure out how much youll need to finance for your preferred car. The figures you get dont include expenses such as fuel or car insurance.
How Much Should I Spend On A Car
The question, How much car can I afford? is based on budget. Were personal finance writers, its what we do. What if we altered the question ever so slightly to How much should I spend? If its not based on budget, and strictly preference, there is another rule of thumb you can follow.
- 10% of your salary If you believe buying a car is a necessary evil. You only drive because your work requires it, but you get no joy out of it.
- 20% of your salary You want a safe, reliable, and affordable car for commuting and errands. Its not about power or aesthetics, its about function.
- 50% of your salary Cars are life.
Knowing the rules, heres a quick reference chart. We used gross annual income in this scenario because the question is less about budget. However, because of the personal finance angle, we opted to not show the 50% to spend on a car, its not wise financial choice for a depreciating asset. Its smart choice if thats what you value and you can afford it.
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Affordable Monthly Car Payments
Most car purchases start as an idea, and end with the question, How much can I afford monthly for a new car?
Ideally, the best rule to follow when buying a car is the 25% gross salary rule, since it is 100% based on what you make each year.
However, that doesnt necessarily help you when it comes to your monthly car payment.
For that, its best to use the 10% number from the 20-4-10 car buying rule .
The 10% number refers to making sure that no more than 10% of your gross monthly income goes towards your automobile costs. The standard monthly car costs include:
- Your auto payment
- Car maintenance
Check Your Credit Score
How much you pay for a car loan in terms of the annual percentage rate is determined by your credit score. The higher your score, the less you pay in interest on a loan.
Your FICO credit score is determined by these factors: your payment history amounts owed length of credit history new credit and credit mix. The FICO score is based on credit reports compiled from the three major credit bureaus: Experian, Equifax and TransUnion.
To understand where you fall on FICOs credit score range of 300 to 850, check your score for free.
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Leave Plenty Of Wiggle Room In Your Monthly Budget
If you worked out a monthly budget using the guidelines above, you probably know about how much you can afford to pay for a car each month. Still, dont forget to leave plenty of wiggle room in your budget.
Life happens and surprise expenses pop up. Roofs and cars need repairs. You might have unexpected medical bills or lose your job. The more extra cash you have in your budget, the better off youll be.
How To Calculate Total Costs
When you start shopping for your next car, it’s important to look at more than just the sticker price. If you live in a state that charges sales tax, for instance, expect that to add to the total cost of purchasing the vehicle.
Also, consider documentation fees, title and registration fees, and other expenses the dealer tacks on to the contract amount. If you choose to add a warranty or maintenance contract, that’s also going to affect whether you can afford the car.
You don’t have to pay these costs out of pocketin general, dealers will roll them into the car loan along with the sales price of the car. But they will increase your monthly payment.
In addition to necessary taxes and fees associated with a car purchase, you’ll also need to think about the cost of car insurance, annual car registration, ongoing maintenance and repairs, fuel and other related expenses that go along with owning a car.
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Four Steps To Help You Nail Down A Monthly Payment You Can Afford
Like it or not, its up to you to figure out how much you can truly afford to spend on a car. No matter what, dont leave it up to your sales guy to decide how much you can borrow.
Why? Because, according to their facts and figures, your credit and income may qualify you to buy just about anything on the lot.
True affordability is never dictated by lenders or big banks. At the end of the day, only you know how much you can afford to spend on transportation and your other bills.
So, how do you determine how much you can afford?
Tips For Staying Within Your Budget
Now that weve faced the cold, hard truth that buying a car is more about what you can afford and less about what you wish you could have, here are some tips to stay within your budget:
As a final tip, Id suggest you begin the negotiation long before you enter the showroom. Get prices via fax, phone, or email. It makes comparing offers very easy, and you avoid hours in the showroom while the salesperson runs back and forth between you and the manager, a process specifically designed to put you at a big disadvantage.
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S To Determine How Much Car You Can Afford
The average cost to own a car is more than $5,264 per year, according to Move.org, which equates to nearly $440 per month. However, that cost can vary by state . So you need to make sure you can afford a car on a monthly basis, not just at purchase time. Here are some basic steps to help check your budget ahead of time.
What Car Can I Afford With My Salary South Africa
These are the cars you can afford to buy with your salary in South AfricaMonthly income requiredCarCar priceR63 000Audi A4 2.0T FSI Sport S-Tronic MY18R565 500R51 000Kia Sportage 2.0 AWD AT R453 000R48 000Mini Cooper Convertible 1.5 MY16R423 200R39 000Mazda3 2.0 Individual 5-dr MY16R341 9008 more rowsMay 16, 2018
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Set A Target Purchase Price
The total loan amount you can afford isnt necessarily the price of the car you can afford. If youre making a down payment or trading in your old car, youll be able to buy a higher-priced car, or borrow less money.
Additionally, there will be sales tax and fees, so think about more than just the price on the window sticker. Once you estimate the car loan amount you can afford, and assuming no trade-in credit or down payment, you can begin to get a realistic idea of the purchase price you should consider.
Youll need to factor in sales tax and fees, which vary by state, to the advertised cost of the car to get your total car price. An easy way to estimate these extra expenses is to add 10% to the advertised price of the car . For example, if you see a car advertised for $20,000, you should assume your total cost the out the door price will be $22,000.
If you want to get a more precise estimate, heres a breakdown of the typical extra costs:
Sales tax: Typically 5% to 10%, and may include state, county and local taxes.
Registration fees: Estimate these fees by using your states department of motor vehicles site.
Documentation fee: Ranges from $80 to $400, depending on your state.
This means that if you can afford a $20,000 car loan, again, assuming no down payment or trade-in credit, youll want to shop for a car with a sticker price of around $18,000 so that youll be able to cover sales tax and fees with your total loan amount.