Shopping for cars is exciting and stressful if you don’t know how much you can afford to spend on a vehicle. Don’t put yourself in the trying situation of paying more for a car than you can afford. Check out these tips for properly calculating how much you can afford to spend on a vehicle.
Analyze your Monthly Budget
According to Car Shopping: How to Calculate Affordability, your monthly income and expenses play a large role in determining how much you can afford to spend on a vehicle. If you don’t currently know how much you spend each month compared to your monthly earnings, now is the time to create a budget.
Accurately analyzing your monthly budget includes more than just looking at your regular bills like rent and cable. Rather, you should also start tracking the average amount you spend on unexpected expenses like medical bills, entertainment and more. Knowing the full picture helps you accurately determine how much wiggle room is left in your budget for a new car.
Look Ahead
Will your expenses stay the same in the next few years or will you be soon taking on other expenses? Examining how much you’ll be regularly spending through the life of a potential auto loan will help you to determine if you can afford the loan payments. Consider such details as whether you plan to continue living in the same place, whether you want to change jobs, if you’ll be starting a family soon and more. Looking beyond your current financial situation will help you to find the best car size and price.
Consider a Trade-in Value
Will you be trading in a vehicle as well as buying a new one? Whether or not you currently have a car to trade-in can influence how much you can afford to spend on a new vehicle. Before you begin test driving cars, ask a few auto dealers what they would offer for a trade-in value on your current vehicle. If you still have a loan on that car, you’ll then need to subtract the remaining loan amount from the trade-in offer. This should help give you an accurate idea of how much you’ll get from trading in the vehicle.
Calculate Insurance
The cost of a car extends beyond the initial purchase price. When shopping for a new car, you’ll also need to consider the cost of insurance. For example, if you have an older vehicle and just have a liability policy, you’ll probably end up paying more for a full coverage policy on the new car. Also, consider the deductible amount of any loans that you’re considering. If the new vehicle needs to be repaired in the future, you’ll need to know the deductible amount. Other costs that can influence your car purchase include state taxes and fees.
Compare Loan Options
If you are applying for a car loan, compare lenders before buying the car. The loan’s interest rate and length can significantly influence which car you end up buying. Your current credit score can also impact which lenders accept your application as well as the interest rate they offer.
Before you reach for the keys of a new vehicle, calculate how much you can afford to spend. Do this by analyzing your budget, estimating the cost of car insurance and more.