So, it’s time for you to buy a car. It’s an exciting prospect, no matter your age, but it’s especially exciting for first-time car owners. If your savings won’t run to the price of a car, you’ve got to try and fit the cost into your household budget, which is no easy task.
A common conundrum for many would-be car purchasers is “What price car can I afford?” There’s a lot of advice floating about the internet, but financial experts tend to answer the question with a simple rule of thumb.
Ideally, you should spend no more than 10% of your take-home pay on a car loan payment. In addition, you should spend no more than 20% for total car expenses. This would include such things as gas, repairs, maintenance, and insurance.
Once you’ve answered the question “What car payment can I afford?” you’re able to set a realistic target price.
Using a What Car Payment Can I Afford Calculator
While the information you find online can oftentimes be confusing, it can also come in very useful, especially when you’re trying to work out “What car price can I afford?” In this situation, you can take advantage of a car payment calculator, such as the one featured on the USNews website.
There are plenty of other car affordability calculators you can use online, and they tend to work in the same way. You start by inputting the monthly payment you’ve decided you can afford. Then you can decide on how long the loan term is. Often there’s an option to choose between a new and used car. You might also need to include your credit rating.
Once you’ve added all this information, you’ll get a total price, estimated APR% and details of the total amount of interest you’ll pay.
You can choose to adjust the information, trying different loan terms and monthly payments, to further customize the total amount of your loan.
Determining How Much Car You Can Afford
Using the 10%/20% rule of thumb might not work for everyone. However, it’s a good place to start and ensures you’re not left scrambling to pay your monthly bills. For a more customized figure, take the following steps.
Determine Your Budget
It’s not unusual to be asking the question “What car can I afford with my salary?” It might seem like an unanswerable question, but you can do it if you choose the right approach.
Start by working out what you spend every month. Write down your monthly take home pay and then deduct various expenses. Everyone’s monthly expenses are different, but yours might include your mortgage or rent, utilities, groceries, savings, child expenses, and money you spend on entertainment.
The figure you have left is partway to an answer for the question “What kind of car can I afford?”
Calculate Fuel and Insurance Costs
Before you start looking for a car, you need to estimate what your fuel expenses will be and the cost of insuring your vehicle. Both costs vary considerably, depending on where you live, the vehicle you choose, and your driving history.
It’s going to take a bit of thinking about, but it’ll be worth the effort and these costs shouldn’t be overlooked.
If you’re not sure about a vehicle’s fuel economy figures, check out the EPA’s Fueleconomy.gov website. There you’ll find a detailed list of annual fuel cost estimates for a range of new and used vehicles.
For insurance costs, you’ll need to contact an insurance agent or company. They’ll be able to provide an accurate estimate. Many auto insurance companies also offer free online quotes.
Calculate the Car Loan Amount You Can Afford
Now you’ve calculated the monthly car payment that’s affordable, you’ve got a good sense of how much you can borrow. However, there are a few other factors to keep in mind. For example:
- Your credit score: The annual percentage rate you pay on your loan is very much dependent on your credit score.
- The term of the loan: This is the number of months you get to pay off your loan.
- Whether you buy a used or new car: In general, the APR for a new car loan is lower.
Recognise Your Car Buying Habits
As well as working out your monthly payments and costs, it’s also good to examine your car buying habits. They offer some good clues as to the best strategy for you to use.
For example, in the past, did you buy a car, pay off the loan, and then keep the car for a few more years? If this sounds like you, a new car could be the best option.
Do you buy a car but get bored with it after a few years and want to sell it? If this sounds familiar, leasing a car might be the better option for you.
Finally, what will be your answer to the question “What price can I afford for a car?” If you want to make the most financially sound decision, you should buy a car that’s lightly used, pay off the loan, and keep the car for many years. That way, the first owner is taking the depreciation hit and you’ve got a car that’s fairly new and won’t require any major repairs for some time.
Should You Buy or Lease a Car?
You’re obviously thinking about leasing a car otherwise you wouldn’t be asking the question “What kind of car can I afford?” But is leasing better than buying? Let’s see if we can help.
Leasing a car is a very tempting offer. You’re going to get a brand new car and often, the monthly payments will be lower. What’s not to like?
However, car leases are riddled with unexpected costs that will drive up your monthly payments. There’s higher insurance rates, mileage charges, and let’s not forget the dreaded credit card test. This is where the dealer charges you for the tiniest scratch and nick.
All of these additional costs can make buying a car better than leasing. That being said, there are a couple of times when leasing might make more sense:
- You only need a car for a few years: This isn’t necessarily a cheaper option, but it’s way more convenient. If you don’t want the hassle that comes with selling a used car, leasing might be the way to go for you.
- You’ve got to have that new car smell: Not everyone relishes the idea of buying a used car. There’s just something about the smell of a new car that can’t be beaten. If you can’t afford to finance a brand new one with your own savings, leasing is an option.
Rules for Financing a Car
You’ve established that financing is the right move and answered the million-dollar question “What car loan can I afford?” but what is the next step?
The following rules of thumb will ensure you get the best deal from your auto loan.
Put Down At Least 20%
When you put down a large down payment, it helps reduce your monthly payments. It makes it more likely that the money you owe your lender is less than your new car is worth, which is a good place to be.
Pick a Loan Term of Less Than 48 Months
It’s going to be tempting to push out your car loan term and lower your monthly payments, but this is not an advantageous position to find yourself in.
When you push out your loan term, you end up paying more in total. Let’s give you an example:
- 48 months X $252.89 = $12,138.72
- 72 months X $175.23 = $12,616.56
In the example above, you end up paying an additional $500 in interest alone. In addition, you’ll have to pay a lender’s higher insurance requirements for two more years. You might also be paying off your car when its value drops after four years.
Keep Your Total Monthly Payment Under 10%
When it comes to using a What Car Can I Afford Calculator, you need to focus on your monthly payments.
Ideally, your total monthly car payment, including insurance, sales tax, interest, and loan principal, shouldnt be more than 10% of your gross monthly income.
If you want to look at it another way you should take your annual income, divide it by 120, and that’s the most you should pay for your car each month.
Let’s answer a question to illustrate this point:
- I make 70k a year. What car can I afford? $70,000 divided by 120 = $583.33
Let’s finish up with a few tips for getting the best possible deals on your car.
How to Get The Best Deal on a Car
- Shop around for car insurance: It pays to shop around because every insurance provider sees driver and car pairings differently. Aim to get at least 5 quotes before deciding.
- Buy used: A used car that passes a pre-purchase inspection is almost as good as a brand new car. In some cases, it might be better,
- Don’t pay for dealer extras: Dealerships love to pile on the extras. In many cases, you can organize the extras yourself at a much lower cost.
- Avoid a dealership if you can: It is possible to negotiate a good deal with a dealership, but you’ll have to work hard and keep your wits about you.
- Make reliability your focus: Your should make reliability a top priority when buying a car. Get help online from Consumer Reports reliability surveys and The Edmunds Inc. True Cost to Own tool.
When you’re ready to make your purchase, remember USTrans.com can arrange shipping for your new car from anywhere in the US to your home.
I make 60k a year, what car can I afford?
The answer to this question depends on which rule of thumb you apply. For example, if you use the rule that says your purchase should be under 35% of your annual income, your limit is going to be $21,000.
What car can I afford with a 70k salary?
Using the same rule as above, 35% of your annual income is $24,500. In other words, your limit is going to be $24,500.