Planning on purchasing a new vehicle in the immediate future? Purchasing a new or used car can come with a hefty price tag. Calculating how much car you can afford may help you save time and money in the long run. Here are a few tips to help you figure out how much you should be spending on your next auto purchase.
Something to note, there are several factors that affect your auto loan, including:
- Loan amount
- Down payment
- Loan term
- Your credit score
- The type of vehicle you choose (lease, used or new)
To Lease or To Buy?
First thing you should do is consider your options when it comes to leasing or buying your next set of wheels. Buying a car means that you own the vehicle once your payments have been made. A lease is an agreement to use a vehicle, new or used, for a certain number of months and miles. Check the pros and cons for each option to see which works best for you.
Consult Your Budget
A good starting point is looking at your budget. Experts say your total car expenses, including monthly payments, insurance, gas, and maintenance, should be no more than 20% of your take-home monthly pay. For example if your monthly paycheck is $4,000 then a safe estimate for all car expenses is $800 per month.
Determine The Purchase Price
Once you’ve calculated your affordable monthly payment, you can begin to determine how much you can borrow. Take your monthly payment estimate and plug it into a car affordability calculator like this. It can help you determine how much car you can afford.
Test Drive Your Car Payments
If you can hold off from buying a car for a few months, it’s a good idea to test out your potential monthly payments. For example, if your car payment would be $800 per month, take that amount and put it into a savings account instead. If you can still make timely payments on your other bills, and put food on the table, then it’s probably an appropriate monthly payment for you to handle. Plus, that’s more money you have saved to go towards a down payment.
The Bottom Line
While there are no set limits for how much car you can afford, there are many guidelines that financial experts suggest. Take into consideration all your living expenses and lifestyle. Decide what you’re comfortable spending and potentially going without. Just because you may be able to afford it doesn’t mean it’s what’s best for your budget in the long run.
Once you’ve decided on the vehicle, visit Credit Union of Denver to help finance your new ride. We have great auto loan rates and favorable terms to help you get what you want. Learn More here.