How Much Car Can I Afford Its A Question Asked By Many Car Shoppers And Its Easy To Understand Why For Many Of Us A Car Purchase Is A Big Expense Second Only To Purchasing A Home
In September 2020, the estimated average price of a new vehicle in the United States was $38,723, according to Kelley Blue Book. But whats a comfortable fit for your budget?
To answer this question, you have two choices: You can follow conventional wisdom, or you can take a more customized approach to budgeting.
How To Spot A Fake Demo Vehicle
Sometimes, car dealers try to pass off a used car as a demo car to make more money off of it or to make the car look more attractive to buyers so that it will sell faster. Theres nothing wrong with buying a used car, but a used car should be priced like a used car. Furthermore, if your dealer is trying to pawn off a used vehicles to you as a demo, he or she may be obscuring the vehicles true condition.
So how do you separate real demos from fakes? Ask how much the car has been used and by whom. If the owner of the dealership was driving the car, but then replaced it a few months later with the same type of car but customized with fancy upgrades or special rims, then the vehicle is not likely being sold because of overuse or hidden damage.
Similarly, if the dealership formerly used the car as a test vehicle, but then a new model of the vehicle rolled out and the dealership wanted to show that model to prospective customers, then it makes sense that theyd want to sell off the old demo. The lack of used vehicle records for demo cars can make identifying a fake demo a little challenging.
But by asking the right questions, test driving the car yourself and having a licensed mechanic from an outside shop look the vehicle over and give it a seal of approval, you should be able to avoid unknowingly driving off the lot in a lemon.
Do: Consider Total Cost Of Ownership
Buyers tend to be preoccupied with new car prices, and the cost of secondhand cars, for that matter. Every car costs more than the sticker price indicates. Its up to you to explore every fee and cost associated with the vehicle youre considering, including loan payment amounts, gas, insurance, and maintenance.
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Do Tesla Gas Savings Reduce The Cost Of Owning A Tesla
In addition to the tangible tax credits mentioned above, Tesla proudly promotes that its EVs provide gasoline savings, as well. Since youre recharging your car battery rather than buying gas, the automaker assures that buying their EVs are cost-effective because of the savings youll see when it comes to gas money.
The gasoline savings that Tesla shows you varies depending on the model you select. But all their figures are calculated assuming that the average driver spends roughly $2.58 per gallon, and drives an average of 10,000 miles per year for six years.
Of course, gas savings can vary a lot based on where, and even how, you drive. Luckily, there are useful websites that allow you to calculate the actual gas savings you can expect with a Tesla.
- Teslanomics: This site offers a calculator that takes into account your driving style, average mileage, and even how much you expect to use Teslas Supercharging network. For now, the Teslanomics calculator only works for the Model 3 and Model Y.
- Chargehub: This website shows you gas savings for each popular EV , based on which state you live in.
Do: Know Your Credit Score
There is a direct correlation between your credit score and the loan youll be able to secure. Your FICO credit score, which ranges between 300 and 850, is an approximate representation of the risk you pose to lenders.
Before ever visiting a dealership, a car buyer needs to know what his or her credit rating is and how that will impact the financing options, said Karl Brauer, former executive publisher at COX automotive. The best way to do this is to get a report from one of the major credit-tracking companies.
Equifax, Experian, and TransUnion can provide your credit report and score.
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Benefits Of Putting Money Down When Buying A Car
There are many benefits to putting a large down payment on a car when financing it. These include:
- Lowers the overall amount financed saving on interest and finance charges.
- Shows your commitment to the lender, with a little skin in the game youre less likely to default on the car loan.
- You can finance your vehicle for a shorter term and pay it off quicker.
- More money down will lower your overall monthly car payment.
- You will be less likely to be in an upside-down or negative equity situation.
Car Buying Tip Always try to pay an extra $10, $25, $50, or more on the principal amount when making your monthly car payment. This extra money will add up over time and help decrease interest charges over the length of your car loan.
Analyze deeper – Insider car buying tips
- Guaranteed credit approval scam Guaranteed credit approval car dealerships work, how to recognize and avoid this advertising scam.
- Dealer prep fee car dealer scam Everything you wanted to know about the dealer prep fee scam, how to recognize and avoid becoming a victim.
- Cashback rebates and finance incentives How to find new car manufacturer rebates or secret dealer incentives available.
Assess Income & Ongoing Expenses
The next step is to figure out what percentage of your annual income you want to put towards your car, as this will help you stick to a reasonable budget. Start by subtracting your essential expenses from your salary, as well as any existing debt obligations you might have . Youll then have a rough idea of your disposable income which can be allocated towards a car. We recommend basing these projections over a year if possible so you can figure out what % of your annual salary can be put towards a car .
For example, if you have an annual income of $70,000 and you spend $40,000 per year in essential expenses that leaves you with $30,000, of which you can then decide, based on your personal financial preferences, how much of this you want to contribute towards a vehicle. As a general rule of thumb, you shouldnt spend more than your annual income on a car. It is actually advisable to spend just 10-20% of your household income on your new car, and if you want to buy a higher-end, luxury vehicle, you might consider spending 20-30% of your household income.
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Pros And Cons Of Buying A Demo Vehicle
There are many great advantages to buying a demo car, but there are some potential disadvantages as well that you may want to consider before making a purchase.
- Qualifies for special offers and rebates
- Qualifies for new car warranty
- Low mileage and less wear and tear than many used vehicles
- If used by dealership employees, then the car may have been handled more carefully to comply with dealership rules such as no pets and no smoking
- May come with upgrades and added features
- Pre-existing mileage may be considered usage under the new car warranty , which would lessen the coverage you get
- May have been more heavily used than the dealer advertises
- Cannot choose your colour or features
- No used-vehicle records exist to verify the cars true condition
- Many experts say that demo cars are not sufficiently discounted to be worth purchasing
Monthly Payments Should Be Less Than 10
I used the neuvoo income tax calculator to figure out that a $50,000 salary means you take home $38,869. If we calculate 15% of that take-home pay, we end up at $5,830.35 or car payments of $485.86 per month.
If you want the best car you can afford at that salary, you could buy a $30,000 car, put a $6000 down-payment, get a 5-year loan at 4% interest and end up at monthly payments for 5 years at $442.
But, you still need to compare car insurance plus evaluate the gas mileage and maintenance costs of your new vehicle. If youâre setting aside $100 per month in maintenance, $200 for gas, $200 of insurance, and $50 in parking fees â youâre spending almost $1000 per month to drive a vehicle.
That $100 transit pass might not look so bad anymore.
If weâre staying with above example, at about $1000 per month on your car, youâre left with $26,869, or roughly $2,200 a month, for rent, groceries, clothes, dining out, tax free savings accounts, GICs, etc. for 5 years.
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How Much Cash Should You Put Towards Your Car Purchase
The $0 down ads car dealers run everywhere have changed the thinking of the car buying society. Even though $0 down sounds appealing, its a COSTLY mistake! Car dealers and finance companies advertise $0 money down because they know its appealing to the customer and they make more money from interest when you buy a car this way.
Your Cash Down Payment15-20% of the Purchase Price
Before calculating what your down payment should be, you should first figure what the true dealers cost is and then fair profit new car offer. Having an idea of what price you want to pay for the vehicle will help you estimate how much money you will need for a down payment.
Once youve figured how much the vehicle is going to be, multiply it by 15-20%. Although this is not possible for everyone, you should always aim for at least a 15-20% down payment when buying a car, the more the better. Larger down payments will help you avoid high monthly car payments, longer terms, excessive bank finance charges, and being in a negative equity situation when you decide to trade or sell the car in the future.
Although, I dont personally recommend less than 15-20% down. The absolute minimum amount of cash down you should have available is at least the total of your tax, title, and license fees . Paying interest and finance charges on taxes and fees doesnt make good financial sense. Putting a little money down is always better than putting no money down.
Best New Car Quote Services
Supply Is Limited But Improving
Inventories remained lean throughout 2021, but they are beginning to recover. As 2021 came to an end, the nationwide inventory of new cars available for sale ticked over 1 million for the first time since August.
Thats still well under a normal level. But its on the way up for the first time in months.
The nationwide inventory of used cars for sale is also starting to show signs of a recovery. Dealers had 2.31 million used vehicles available for purchase at the end of November. They ended October with 2.25 million.
But even that inventory growth may be contributing to price increases. Because, while dealers can offer more used cars for sale, theyre mostly expensive ones.
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Fees Every Car Buyer Pays
Sales TaxSales tax is the biggest extra cost when buying a car ). How much you’ll pay depends on the tax rate of the state in which you register the vehiclenot where you buy it. You won’t save on sales tax by buying a car in a state or nearby county with a lower tax rate. Some cities and counties add more sales tax to the state amount, too.
While these charges are unavoidable , you may be able to lessen the tax burden a couple ways. If you trade in a car, most states subtract the amount you receive from the dealer from the taxable price of your new vehicle. This is one reason to get the best trade-in price possible.
You may also save on sales tax through dealership rebates or incentives that reduce the sales price of the car. Fewer states allow this option, though.
Altogether, sales tax rates can be above 10 percent. For a $35,000 car, that means paying a bill of $3,500. Figure out how much you’ll owe using a sales tax calculator.
Is Now The Time To Buy Sell Or Trade
Most years, winter can be a solid time to buy a car. Prices typically drop as dealers switch from one model year to the next, and theyre anxious to sell the older, outdated vehicles.
However, for most of the past year, there hasnt been a good time to buy, mainly due to the microchip shortage, creating shortfalls in inventory. As a result, new car buying incentives all but evaporated at the end of last year, hitting a 5-year low.
New car prices have shot up to record highs over and over since late spring. Record high prices have pushed some would-be new car shoppers into the used car market instead. Meanwhile, used car prices went up even faster than new car prices.
We break it down for you.
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Car Ownership Cost Estimator
With some research and knowledge, you can save yourself a lot of money on buying and driving your car. Make sure you take all the necessary time to weigh the costs, evaluate your options and choose a car that best fits your needs and budget.
In an effort to help drivers understand the true amount involved with owning and driving a vehicle, the CAA offers a tool to estimate the total outlay. Try it out to get an idea of what you will spend.
Examples Fuel Efficiency For Vehicles In Different Classes
We did a little research on fuel consumption ratings and yearly costs using the Ministry of Transports Fuel Consumption Ratings Search Tool. We put together some charts to help illustrate fuel efficiency and consumption for cars from various classes.
NOTE : Estimated annual fuel cost is based on the combined rating, a driving distance of 20,000 km and forecast prices of $1.09/L for regular gasoline and $1.24/L for premium gasoline.
Notice that yearly fuel consumption costs range between $1,482 for a Honda CR-Z which is a sub-compact car and $2,594 for a Ford F-150 which is a standard pickup truck. In general larger vehicles consume more fuel as they are heavier and have larger engines.
Remember that fuel prices fluctuate, sometimes widely, so this can change your annual costs for owning a car.
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And If You Really Love Cars
To all you personal finance blog regulars out there, this probably sounds good so far. If this is your first time here , you might be thinking, These people are so cheap! Thats crazy. Theres no way I can get a car I want for that money!
To you, I would say: Ask yourself why youre saying that. Is it because youre a car guy and you value your car most out of all your possessions? Or is it because youve simply been conditioned by our culture, advertising, and car salespeople to think that you should buy a brand new car and that theres nothing wrong with spending a years worth of paychecks on a car?
If its the formerthat you love carscool. Theres nothing wrong with intentional spending on the things you value most. By intentional spending, I mean spending moneymaybe more than other people would think is sensibleon things that interest you.
So if you value your car, I dont see anything wrong with spending more than we recommend for most people, perhaps up to 50% of your income on a car. Chances areas a car personyoull care for the car more, enjoy it more, and get more money for it when you sell it than the average car owner. Again, you just have to remember that because the car will be a large expense, youll have to be extra vigilant about other expenses.
How To Buy A Car Right Now
If you want to purchase a new or used vehicle, be prepared for the higher prices.
But take stock in some good news that has little to do with price: The next car you buy is likely to last a long time.
Quality studies repeatedly show that todays new cars suffer fewer problems than those from even just a few years before. And theyre lasting drivers a long time. The average vehicle on American roads is now more than 12 years old. That means that any buyers of higher-priced used cars will likely see the car last even longer. The same goes for those buying new ones.
With most automakers now building such durable cars, they compete by adding more and more high-tech features. Options like adaptive cruise control and Apple CarPlay are now more common than ever on entry-level vehicles.
How to Sell a Car Now
Few of us are in the position of selling a car without needing to buy a replacement for it. But, if thats you, what are you waiting for? There may never be a better time to sell your existing car for top dollar.
The best way to get the most money for your used car is to sell it privately. But, if you dont want the hassle, this is a perfect time to sell to a dealership.
Dealers are hurting for cars to sell. Theyre particularly desperate for older, higher-mileage models. As their inventory recovers, theyll be less motivated, so now is the right time to approach them.
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