Is it time for a new car? Buying a car can be exciting because it’s like buying a new toy. You get the new car smell, and usually upgrades and features that your old car doesn’t have.
You’re probably asking yourself, “What car can I afford?” It’s a smart question to ask, as more people are buying cars, only to find out that they can’t afford them. About 7 million people fall into this category and are delinquent on their car payments.
That can have lasting damage as those late payments will remain on their credit reports for years to come.
How can you avoid a similar fate? Keep reading to find out how much car you can really afford.
Take an Honest Look at Your Finances
There are a few things to consider before you start shopping for your car. Your financial situation and your credit score will play major roles in answering the question “What car can I afford?”
There are general guidelines to think about when you’re looking at your financial situation. The standard guideline is that your car payments shouldn’t be more than 10% of your pay.
That’s a good starting point, and there’s an opportunity to dig a little deeper. You need to take into account your net pay, not your gross pay. You might think that you make $50,000 a year, so you can afford a $400 a month car payment.
That will get you a pretty sweet car, but you need to calculate your pay after taxes. That can change things dramatically. Let’s say that you pay 20% in state, local, and federal taxes. That will bring your monthly payment down to about $330.
If you’re a freelancer or a new business owner, your income is going to be difficult to determine. There are ways to keep your finances stable, but most freelancers struggle with the unpredictability of income.
Take an average over the last 12 months of your post-tax earnings to determine what you can afford.
The Total Cost of Owning a Car
One thing that so many home buyers overlook is that a car payment is just a part of owning a car. You still have to pay for gas, insurance, maintenance, and extended warranty packages.
There is a general guideline for the total cost of the car, which should not be more than 20% of your take-home pay. To calculate this figure, you’ll need to keep in mind how much you drive the car, the gas mileage of the car, and insurance.
Let’s say that you have an hour commute to and from work every day. You also drive a gas guzzler that gets 17 miles per gallon. That’s going to add up very quickly. You’ll be better served driving a car with a better fuel efficiency rating.
Other Financial Obligations
What are your main financial obligations? Do you have a lot of debt already? You’ll need to calculate your expenses along with your take-home pay.
For many buyers, financial obligations such as student loan payments and mortgages can eat up a lot of your paycheck. That can mean that you have less money than the general guidelines suggest you should spend on a car.
Take a realistic look at the entire financial picture. You might find that you can do without something while you can still get a great car and afford to pay for it.
The last part of your financial picture is your credit score. This is going to determine your chances of getting approved for financing. It will also determine your interest rate.
You want to make sure that your credit score is high so you can take advantage of the best financing options available.
What Car Can I Afford?
At this stage, you’re likely to have an idea as to what kind of car you can afford. We still have to do a little more number crunching, though.
For starters, do you have money saved up for a down payment? How will you finance the rest of the car?
Don’t forget about additional fees on top of the list price of the car. State taxes, title and registration fees, and dealership fees can add up and the next thing you know, your down payment is enough to cover those fees.
You’ll want to add those into the cost of the car as well. This will give you a better sense of what you can realistically afford.
Once you have those numbers, you’ll be able to figure out how much car you can afford. It can be within a range, say $175 – $250 a month. Your job is to stick with that number as you start shopping for a car.
Shopping for Financing
A lot of dealers will offer financing, but you can shop around for auto loans. You might find a better interest rate by shopping around.
Plus, if you get preapproved for an auto loan, dealers will be much more willing to work with you on the pricing. They know that you’re serious and ready to buy. Some dealers consider a preapproval letter just as good as walking in with cash.
Shopping for a Car
Do you know how much car you can afford? Now comes the fun part: shopping for a car. You can start shopping for a car by doing a little research online. You can start to view options here.
During this part of shopping, you might find some models that you really want to have. You’re also going to decide if you buy new or used. There are advantages to each and having a clear idea of your financial picture will make that decision easier.
Get the Car You Can Afford
A car is a necessary part of life. Without a car, it would be hard to get to work, take your kids to soccer, or just go for a drive in the countryside.
Buying a car that you can afford is a big responsibility and too many people miss the mark. With careful analysis of your financial picture, you can avoid getting into financial hot water down the road. You’ll have the answer to “What car can I afford?”
Would you like more financial tips? Check out these tips to achieve financial freedom.