How Much Can You Pay for a Car?| What Amount Makes Sense for Your Income
- February 16, 2021
- 6 min read
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Are you in a position where you need to buy a car? Maybe your current vehicle quit running, or you’re simply ready for something better than what you have. Whatever the case may be, you’ve surely pondered just how much you can afford to spend on a shiny new ride.
To help you determine what makes the most sense for your income, join us as we share our resident auto experts’ opinions on the matter.
First and foremost, they advise that you not spend more than 10% of your income on a car loan. When it comes to repairs, fuel, and regular maintenance, you shouldn’t surpass 20% of your income. These are all things you need to plan for throughout the life of your new car.
When you have determined how much you can comfortably afford to pay on a car payment, it’s time to calculate the loan amount you can afford to borrow. Try to set a realistic price here. Once you have done that, you’ll find that it’s much easier to crunch numbers.
To help you with this, there are many online loan calculators that you can take advantage of. They don’t cost you a dime and can be used freely to determine your budget limits. Let’s take a minute to discuss how you should use a loan calculator.
Using a Car Loan Calculator
You will find that most car loan/payment calculators begin by asking you to enter the total loan amount you want. This is then followed by other related factors that help you see what your monthly payment equals out to.
Many loan calculators adjust the APR and loan term when you change the total loan amount. This is a handy and helpful feature to have, as it lets you see in real-time what your payments, terms, and rates are likely to look like.
Sometimes, you can select between either a new or used vehicle that you’re planning on buying. This will allow the calculator to display your APR estimates based on average APR for new and used vehicle loans as they attribute to that credit tier.
Feel free to play around with different terms, as well as other available inputs. Doing so will give you a better understanding of your loan amount so you can compare it against your budget and crunch numbers.
It’s a huge advantage to have access to car loan calculators. You’ll get a first-hand account of possible loan amounts and know what to expect when you finally secure funding for your new vehicle. If you find a vehicle that you really like but are afraid that it’s just out of reach, online car calculators let you adjust your budget with the figures you get back so you can make a loan work.
Playing the Game
Calculating what you can afford before you visit a car dealer is a big deal. A really big deal. As in, it can potentially save you hundreds or even thousands of dollars by the time you’re finished with your purchase.
What’s more, car sales members will be less likely to take advantage of you when you give off the vibe that you know what you’re talking about and are familiar with car buying in general. Unfortunately, the following scenario happens all too often: A person goes in to buy a car not having the first clue about the process.
Options are added on, the final sale price is through the roof, and the salesperson just made out like a bandit. Literally. You can argue that they were in their legal right to do what they did. But the truth is, they took advantage of their customer’s lack of knowledge and business acumen.
Don’t think this won’t happen to you if you don’t come prepared. Fortunately, when you have financial numbers at your side and a solid game plan, most salespeople will see you as well-informed and not to be trifled with.
Always remember that dealerships mark up their inventory, whether or not they say otherwise. As such, you should do all that you can to make sure that you walk away with a new vehicle at a better price than what was initially listed.
How to Figure Out What You Can Afford
With that out of the way, let’s move on to figuring out what you can actually afford to pay on a car loan. Follow us as we detail the necessary steps for calculating your monthly payments.
Step #1: Calculate the payment you can afford
Again, we advise that your monthly auto loan payment be no greater than 10% of your income. This is after taxes are deducted, by the way, so you aren’t caught with any unwanted surprises come payment time.
Here’s a good example of a monthly payment based on 10% of your income: Let’s assume you bring home, after taxes, $5,000 a month. Based on that figure, you should be able to afford a $500 monthly car payment.
You also need to consider the length of time you will be making that monthly payment. On average, it’s best to set a maximum loan term of three years (36 months) if you’re buying a used vehicle. Conversely, if you’re buying a brand new vehicle, you should set a maximum loan term of five years (60 months).
While it’s true that agreeing to a longer loan term will make your monthly payments smaller, you will actually be paying more in interest in the long run. What’s more, this can ultimately cause you to pay more for your vehicle than what it is worth.
Step #2: Calculate the loan you can afford
Now that you have an idea of what you can afford to pay on your monthly car payment, it’s time to figure out how much money you can comfortably afford to borrow. There are several factors that can affect this figure, including:
This will contribute to determining your loan’s APR (Annual Percentage Rate).
This is how many months you’ll have to pay off your car loan. Please note that new vehicles usually have lower APRs if you’re trying to get the lowest APR possible.
Step #3: Set Your Target Buying Price
Remember, the total amount that you can afford to pay on your loan isn’t necessarily going to be the price you can afford to pay for your car. Are you trading in your old car? What about a down payment? Either way, doing so will allow you to buy a more expensive vehicle or borrow less money.
It’s important not to forget to factor in fees and sales tax, as well. You can’t just go by the sale price on the sticker. Once you have estimated the amount you can afford to pay on your car loan, you’ll start to get a clear picture of the most affordable purchase price for your budget. That is assuming there is no down payment or trade-in credit, as either will affect the final price.
To help you determine additional costs, here are some figures you can use in your budgeting:
Depending on where you live, you could pay between 5% and 10%.
Use your state’s DMV (Department of Motor Vehicles) website to get an estimate of this fee.
Depending on where you live, this can cost between $80 and $400.
Add the above values to your vehicle’s sale price so that you can get within your budget. If you can swing a $15,000 car loan, it’s best to look for a vehicle that costs a couple of hundred dollars less to account for the additional fees you’ll be paying.
Finding a Car in Your Price Range
It’s always a good idea to take advantage of online resources like Kelley Blue Book or AutoTrader to determine the going price of various vehicles. Try setting your maximum car purchase price below what you can actually afford. This will help to accommodate pricey sales taxes and fees.
We hope our guide helped in your journey to buying a new vehicle. Remember to use as many resources as you can to help you get the best price possible. With diligence, determination, and research, you can walk away with the car you want at a price you can afford.
If you would like to learn more about loans, please be sure to check out our blogs page for more helpful information. We have a wealth of beneficial articles covering a wide range of topics, from small business loans to home equity and more.
As always, if you have any questions, please don’t hesitate to contact us any time. We are always happy to offer guidance and direction to ensure that you make the best financial decisions in your life.
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