Friday, March 22, 2024

How To Afford A New Car

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Make Sure Any Extras You Buy Are Needed And Worth It

How to afford a new car

The dealer will probably try to sell you a pimped-up version of whatever shiny model you want. This may include cruise control, Bluetooth, sat-nav or alloy wheels or a car in a particular shade of metallic blue. All these will bump up the cost, but do you really NEED them? And if so, can you get them cheaper elsewhere?

For example, Navmii is a free app which turns a GPS smartphone into a sat-nav, with pre-loaded maps, route planning and voice prompts.

And then check what the dealer’s ‘throwing in’. This is usually anything from service plans, warranties and sometimes even a year’s insurance. But, always check these are actually thrown in for free. As above benchmark a price for the make and model you’re after if the price is substantially above this, then it’s likely you’re paying for the extras in the price of the car itself.

But, don’t discount their worth. Warranties can save you £300-£500 a year compared with buying it separately car insurance is often this much in a year too. It’s always worth comparing how much you’d pay outside of the ‘free’ add-ons. And then making an informed choice from there.

Also remember that it might be cheaper to buy a premium model with all the extras included rather than the basic model and then adding them on, like how a ‘make your own’ pizza can be more expensive.

Consider Your Annual Income

According to MoneyUnder30 the recommended range for a vehicle budget spans from 10% of annual income to 50%. For example, lets assume earnings of $50,000.

The 10% rule

One rule you may wish to follow if youre more on the frugal side is spend no more than 10% of your annual income on a car. Lets say you make $50,000 annually.

10% of annual income: $5,000, the amount to spend on a vehicle.

Now, $5k isnt likely to net you a new vehicle, but you could find a great used car under $5,000 with our helpful guide.

The 50% rule

Income: $50,000

Vehicle purchase price: $25,000 = 50% of $50,000

According to Kelley Blue Book vehicle valuations, the average midsize car fits perfectly with a 50% vehicle budget. But remember, youre going to need gas, maintenance, vehicle registration and more. Can you safely fit that into your budget?

The 30% rule:

A more modest and generally affordable cap would be 30% of your annual income. This gives you ample room to budget gas, insurance, maintenance and other car related expenses as needed.

Income: $50,000

Vehiclepurchaseprice: $15,000 = 30% of $50,000

How To Tell If You Can Afford A New Car: 5 Key Factors

Figuring out what you can afford isnt as easy as looking at your bank account balance. Fortunately, calculating your finances is made simpler with help ranging from advice blogs and online tools. Jessica Moorhouse, owner of Mo Money Mo Houses, personal finance expert, blogger and podcaster, sat down with us to discuss the different factors that affect the affordability of a new car. Here they go:

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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.

Heres Why Financing Is Almost Always Better Than Paying Cash

How Much Can I Afford To Pay For A New Car

On paper, paying cash makes much more sense. You dont have to worry about a monthly payment, you dont pay a dime of interest, its one-and-done.

However, theres an opportunity cost to paying cash.

If you write Carmax a check for $15,000, thats now $15,000 that you cant invest and multiply.

To illustrate, lets say you choose to finance instead of paying cash. You put 20% or $3,000 down, and set up autopay for your $300 monthly payment.

That leaves you with $12,000 today to play with.

  • You could put it in an S& P 500 index fund where it could become $30,000 in five years.
  • You could put it in your retirement account, where it could become $113,000 in 30 years.

As a general rule of thumb, its usually worth financing at a 2% interest rate or lower and stashing the cash in other places where it can grow much faster. As a cherry on top, financing with a low interest rate is better for your .

For ideas on where to invest your extra car cash, check out our article 7 Easy Ways to Start Investing with Little Money.

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The Best Time To Buy A New Car

Once you’ve decided what car to pick, now you need to know how to get the best deal. One way to slash costs is to buy at the right time.

Dealers have targets to meet, with bonuses up for grabs. Typically, these are based on quarterly sales, making the end of March, June, September and December a good time to buy. They need to shift cars, so will be more willing to negotiate and offer attractive finance packages.

For a quiet time, try to avoid weekends or the start of the month just after payday. A dealership crammed with wannabe buyers isn’t a good place to bargain hard, so it may also be worth avoiding new numberplate seasons too.

Think about the style of car, too. Summer’s when drivers dream of buying convertibles, making winter a good time to get a deal on one. Here are some tips from a broker and a dealer on when to buy to get the best deal…

Don’t leave it to the last day of the quarter, as once targets are met any deals will disappear.

Richard Sanders, Drivethedeal.com, an online broker

All dealers work to three-monthly sales targets… Most of us try to hit target way before the end of the quarter, we did our best deals in Feb and early March and are now basically done for the quarter.

– Forumite Saversammy, a dealer

Calculate The Car Loan Amount You Can Afford

Now that youve calculated your affordable monthly car payment amount, you can get a sense of how much you can borrow. This will depend on several other factors, including:

  • Your credit score, which will in part determine your annual percentage rate, or APR, on the loan.

  • Your loan term, or the number of months you have to pay off the loan.

  • Whether you buy new or used. New car loans tend to have lower APRs.

With a monthly payment, an estimated APR and loan term, the car affordability calculator works backward to determine the total loan amount you can afford.

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How To Buy A New Car In 8 Steps

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Steps

Buying a new car can be a daunting process from trying to get the best deal to avoiding unwanted upsells.

Doing it during a pandemic doesnt help either. Supply chain disruptions and a lack of semiconductor chips have led to inventory shortages and rising prices. You may not be able to find the model you want in stock, and it could take months for it to arrive. If you need a car now, its worth considering buying a used car a similar but often more involved process.

To avoid common car-buying mistakes in the current market, there are some tried-and-true steps youll want to follow, such as determining how much you can afford to spend, which car you want to buy and the true market value for that car in your area.

Determine Your Fuel And Insurance Costs

Can I Afford a New Car?

Before you set out to buy or lease, find out what your fuel expenses will be and what it will cost to insure the vehicle. Both costs vary considerably based on your location, your driving history and the vehicle you’ve chosen. Even though it takes a little work to come up with these estimates, you shouldn’t overlook them. Knowing these costs can help you choose among multiple vehicles. Some may cost more to fuel up others might have a higher cost to insure.

The EPA’s Fueleconomy.gov website has a detailed listing of fuel economy figures as well as annual fuel cost estimates for both new and used vehicles.

For insurance quotes, contact your agent or insurance company about the vehicle you’re interested in. You should be able to get an accurate estimate. Or go to the auto insurance website of your choice, and there should be an option to get an online quote. Do insurance and fuel costs add up to 7% or less of your monthly paycheck? Then you’re OK.

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Saving Up For A New Car

Paying with cash is normally the cheapest way to pay for your car. Even if you dont think you will be able to save enough to buy the car outright, you could save as much as you can afford to pay the biggest deposit possible. That way you will be spending less on loan interest.

After youve done your budget, you can see if you can have any extra money to save towards the cost of your car. Maybe you can cut back on your spending. Be realistic about what you can afford to save each month.

Once youve decided to put aside some money each week or month, its a good idea to put the money into asavings account in the post office,credit union or bank. This way you cannot access it too easily.

Use our advice on how to build up savings to help start saving towards your new car. We have advice on finding money to save and other money-saving tips.

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.

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Rule #: The Retirement Rule

My most popular tweet in the past few weeks was when I made up a car affordability rule on the fly, and you know what, I stand by it.

New fave car advice I just made up: dont buy a car that costs more per month than you can afford to save for retirement.

Desirae Odjick

If cars are important to you, I have no beef with that.

You can spend your discretionary income on whatever you want, and if your financial situation allows it, you can totally ignore the other guidelines and dedicate more of your monthly budget to buying a caras long as youre not paying more for a car payment than youre saving for retirement every month.

Thats the whole rule. Look at how much youre saving for retirement, and dont spend more than that every month on a car.

If youre not saving for retirement, this is a great prompt to start. If you love cars, and youre not saving all that much for retirement, its a great time to increase it. You end up getting the car you want, and because youre also making sure to invest some money for future you, you can rest easy about the money stuff.

just please make sure you can still afford to make rent and eat. I feel like that maybe had to be said.

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Before You Drive Away Drive A Hard Bargain

How Much Can I Afford To Pay For A New Car

Once its time to sit down and talk pricing, come prepared with the research youve done. See if other dealerships are offering better deals on your vehicle and seek a price match from your salesperson. You should also be prepared to say no to those nice-to-have extras that you might not need.

If youre looking to trade in your current car, save that discussion for after youve negotiated the sale price of your new car. Having those conversations separately will help you get a better deal on your trade-in, and youll fare even better if youve done research on your current cars value online.

Before you sign the final contract, go over all of the details carefully, examining any proposed fees and double-checking that everything you negotiated verbally is also spelled out in writing.

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Auto Loan Term Length

For our list, we wanted to highlight lenders who offered a range of loan terms to better appeal to our readers. By highlighting lenders who offer a wide range of loan terms, we sought to provide the most value to our readers.

The best loans offer the right combination of term and rate, and we sought to identify lenders who offer different loan terms so that our readers would find an option that best met their financial goals.

Is A New Car Worth It

Before you start saving for a brand new vehicle, its important to ask yourself if a new car is actually worth it.

In most cases, its not.

For one, a new car loses its value the second you drive it off the lotand then continues to do so over the course of time. And unless youre planning on driving that car for the next 10 to 20 years, its a pretty terrible investment.

In fact, if you decide to sell the car within a year or two, youll likely lose quite a bit of money.

And secondly, the cost of new cars these days is exorbitant. Even a modestly priced new car can cost upwards of $30,000 or $40,000. And unless you have that kind of money just sitting around, your only option would be to finance it. This means youll probably be making car payments for the next three to five years or more. No fun.

So, is a new car worth it? In most cases, no.

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How To Determine What Car You Can Afford

Your salary can help you understand how much car you can afford, though it will also depend on your other financial obligations and expenses. Take a look at the different salary ranges below to find out how much car you can afford based on your salary, what your monthly payment would be, and how much money you need to save up for a down payment.

Your Down Payment Should Be Around 20% Of The Purchase Price

How Much Car Can I Afford (20/4/10 Rule)

The reason experts recommend putting at least 20% down is because your car depreciates the moment you drive it off the lot. According to CARFAX, your cars value will depreciate by at least 10% within the first month of driving and at least 20% in the first year.

If you put less than 20% down and have a long loan term, you could end up paying more than the car is worth given the rate of depreciation. However, if you can put more money upfront, your car payments will be lower and youll be closer to paying off your car.

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Can I Afford A Car What The Calculators Wont Tell You

Youre eyeing a new car, but just one question: how much car can you afford? You might be trying to hang on to your current car as long as possible, because you arent totally sure if you can afford that new car payment.

Thats the agonizing question, isnt it? How much car can you really afford? The answer isnt actually about your monthly take-home pay, nor is it about your credit score and how great of a rate you can get from your credit union. Its about your priorities, and heres how to totally nail it down.

Finding A Car You Can Afford

Once you have your target purchase price, you can use an online car-shopping site to find different models listed by price. Many of the sites, such as Edmunds, Autotrader and CarGurus, have car-buying apps as well.

But remember to set the bar low. When searching for cars, set your maximum price below the total amount you think you can afford. Sales tax and fees can easily add up to an extra few thousand dollars.

About the author:Philip Reed is an automotive expert who writes a syndicated column forNerdWallet that has been carried by USA Today, Yahoo Finance and others. He is the author of 10 books.Read more

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The Two Times Leasing Might Make Sense

All that being said, there are two cases in which leasing might make sense.

  • You only need a car for three years. To be clear, this method isnt necessarily cheaper than buying used but it is a bit more convenient. If you dont want the hassle of having to sell a used car, leasing might be the way to go.
  • You gotta have that new car smell.If you cant bear the idea of driving a used car, but also cant afford to finance a brand new one, leasing might be an option. But we still recommend that you convince yourself that a used car is the better move.

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