If you’re in the market for a new car, you may find yourself overwhelmed by the range of amenities, fuel-efficient engines, and high-tech infotainment systems. These are available in an array of prices to suit different budgets. One of the first steps towards narrowing down this vast selection is to pinpoint what your budget is, or you may end up suckered into buying a car that you can’t really afford. To determine how much car you can afford, you’ll need to think about three main issues.
The first issue to consider is how big of a down payment you’ll be able to put towards the vehicle. Do you have cash saved for the car, or do you plan to trade your current vehicle in? Some auto loans will be available to those who only have a small percentage of the total cost to put down up front, but these tend to incur higher interest rates and are only available to those with excellent credit. Generally, it’s best to pay at least 20% of the overall cost to minimise your loan payments. A higher down payment means that you will need to borrow less, which reduces interest and monthly payments as a result. If you are finding it difficult to come up with 20% of the total price of a car you’re interested in, it might be a sign that you should start looking at a lower price bracket.
With the down payment ready to go, you’ll also need to figure out how much you can set aside each month for your loan payments. As a general rule, financial experts recommend that you spend no more than 36% of your gross income on total debts. So if you already spend 20% of your income to pay down your student loans and credit card debts, that would leave you with 16% to potentially spend on auto loan repayments. To determine this number, you’ll need to calculate how much 36% is, and then total up all of your other monthly payments. Subtract this total from the 36% to get your monthly payment amount.
Loan Terms and Interest Rates
With a down payment and monthly payment in mind, you can start shopping around to compare interest rates and loan terms. The length of the loan can impact your monthly payment amount significantly. You might be able to afford more car if you agree to a longer loan term, because monthly payments will be lower. However, remember that you’ll end up paying more in the long run due to increased interest.
The cost of owning a car involves more than just the sticker price. You may have your eye on a reasonably priced Ford Ranger at Motoring, which seems to fall within your price range. Yet before you make a purchase, you’ll also want to look closely at figures like sales tax, registration fees, the cost of insurance, and the car’s fuel economy. Research the car’s reliability and find out whether a warranty or service contract is included with purchase. If not, you could end up paying more out of pocket for repairs.
By taking the time to calculate how much you can comfortably afford, you’ll be able to define a budget that you can stick to as you shop around. This will help you narrow down your options to find the best fit, both for your wallet and lifestyle.