Before entering a dealership, you should first take the time to figure out how much you can afford on a car. When budgeting for a vehicle, it’s important to take multiple factors into consideration, and not focus solely on the loan payment.
Below are four things you should consider when calculating your monthly car payment:
To determine your loan payment, you’ll need to consider the value of your trade-in, the value of the vehicle you’re purchasing, the term of the loan, finance rate, and down payment. If this seems a little over your head, there are a number of car loan calculator tools available online to help you out.
The best way to lower your loan payment is to put down as much as you can up front. It will be tough to see your hard-earned savings disappear, but it’ll also cost you less in the long run, as you’ll be paying a smaller amount in interest.
Also remember that the longer the loan, the more you’ll be paying in interest. Even if you can’t afford a large down payment, you should at least do everything in your power to shorten the length of your loan.
Considering you can’t legally drive without insurance so make sure to include it in your monthly car budget calculation.
If you feel strapped for cash, it should be noted that there are ways of lowering your insurance payment, such as raising your deductible, lowering your premium, and/or bundling your insurance together.
While most maintenance costs are often unforeseen, it’s still important to budget in case a problem arises. Look at your bank statements to determine how much you spent on repairs over the course of last year, and divide that figure by 12. This should give you a rough estimate of how much you’ll need to budget for your new car.
Don’t forget to also set aside money for oil changes and the occasional car detailing.
If your commute to and from work is more than an hour, you’ll likely be racking up a considerable gas bill by month’s end. For many commuters, their gas bill is the most expensive cost in their budget, with some individuals spending between $200-300 per month on fuel.
If you feel you spend too much on gas, you should strongly consider looking at vehicles with good fuel economy ratings.
The Benefit of Budgeting
If you know your monthly budget ahead of time, you’ll know which vehicles you can actually afford, and won’t waste time at the dealership looking at expensive models. Ideally, your monthly budget should not exceed more than 20% of your income.
Everyone may want the car of their dreams, but being strapped for cash simply doesn’t make it worth it. Too many people make the mistake of treating themselves to a vehicle out of their budget, and are surprised later on when they realize they cannot afford it.