HOW
MUCH CAN I AFFORD?
Determining
what you can afford before you begin shopping for your new car
is a crucial step in the new car buying process.
When
you make the decision to buy a new car one of the first steps
you need to take is to calculate just how much you can afford.
You also have to take into consideration all the variables that
make up the expense of owning a new car such as monthly payments,
insurance, titles and taxes, license plates and fuel. For the
first three years most new cars will come with a warranty to cover
repairs, but these do not usually include items such as tires,
batteries, and oil changes. You may want to consider the cost
of these items when estimating your total new car expense.
One
rule of thumb is that your new car monthly payment should not
exceed 15% of your monthly income. To calculate this, take your
weekly take-home pay and multiply it by 4.3. Next, multiply
that amount times .15. The result will give you the gross amount
that you can afford.
For
example, if you average a weekly take-home amount of $500.00,
multiply 500 x 4.3. This gives you a monthly take-home average
of $2150.00. Now multiply the $2150.00 x .15. The result is
$322.50. This would be on average what you can afford to pay
monthly for a new car.
By
the time you figure in Insurance, titles and taxes (one time
expense) and license plates (annual expense) your total new
car expense may be over $500.00 per month. Insurance is a big
factor in determining what you can afford. New cars will generally
cost more for insurance than used cars. Sporty new cars will
cost even more. Your age and how long you have been driving
will also play a key role in how much you will pay for insurance.
When you add in these expenses to your total monthly payments,
try not to exceed 20 - 22% of your monthly take home pay.
So
now you have a monthly amount of what you can afford for a new
car but please do not go into a dealership and tell them what
you can afford monthly on a new car. Many dealers know how to
finagle the amount - - usually with a higher interest rate over
a longer term - - to meet your needs.
Use our auto loan calculator
to determine the total price of the new car that you can afford.
Play around with the numbers until you get your affordable monthly
payment. Keep in mind that the longer you finance your new car,
the higher the interest rate will be and ultimately, the more
you will pay in the end.
In
a nutshell, before you shop for a new car determine:
- The total monthly payment that you can afford. Do not exceed
15% of your monthly take-home pay, 20 - 22% when adding in
insurance and other expenses.
- The cost of insurance for your new car. Call your insurance
company to get quotes.
- How long you want to finance the vehicle. Keep in mind the
longer you take to pay off your new car, the more you will
pay in the end.
- What the price range is for your new car to meet your affordable
monthly payment. Use our auto
loan calculator to help determine this figure.
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