By: Dannie Phan | August 26th, 2020
In today’s America, a car isn’t just a want—it’s a need. Unless you live in a city with stellar public transport, you’d have a hard time getting to work, appointments, and social events without a sweet ride. We’re sure you’ve wondered, “How much car can I afford?” It’s a wise, valid question. How much money should you spend on a new or used car? What kind of monthly car payments will you be able to afford, based on your take-home pay? Strap in, we’re answering all that.
How Much Does a Car Cost? It Depends!
The cost of a new car varies drastically, especially once you count all the expenses associated with car ownership. Before you commit to the car of your dreams, you have to consider a few things. Who said car buyers had it easy?
The Sticker Price Isn’t Final
The sticker price on cars isn’t final for most dealerships. There’s always some wiggle room, you just have to be persistent.
Start by finding out how much the dealership paid for the new vehicle. Then, go off from there. Starting your counter-offer at 1 to 5% above the dealer’s payment amount is a good idea. You can also check out virtual showrooms, such as Edmund’s, to find the best deals around you.
Moreover, sometimes you can get a good price for your next car if you do a trade-in over your previous car’s value. Talk to different dealers to see what offers they have for trade-in value.
Paying for Add-Ons?
Add-ons are certainly not necessary. If you’re trying to get a new car for less money, do your best to politely dodge the salesman’s efforts to sell you any extras. They can cost a pretty penny.
Make Room for Insurance Costs
The price of the car isn’t the last thing to worry about. For starters, auto insurance is a major expense that goes into car ownership. You’ll find plenty of different policies available at a wide price range. Choose the car insurance policy that best suits your monthly budget.
How Much Will I Pay in Tax and Other Fees?
You can expect to pay between $500 and $1000 per year on extra fees. This includes sales tax when you first buy your ride and licensing and registration fees. Keep in mind that this varies by state, but it’s still important to factor into your budget.
Making Monthly Car Payments: Choosing the Best Auto Loan
Many financial experts will tell you to always pay cash on your vehicle purchase. But not everyone has great savings accounts waiting to be tapped into. You can always get a car loan that works for you.
Down Payments, Interest Rates, and More
You’ll get the best deal on a car loan payment if you pay a good chunk of the car’s purchase price as a down payment. Aim for between 10 and 20%.
On top of that, you’ll also have to negotiate with your lender the loan term. For how many months are you willing to make payments on your new vehicle?
Lastly, find out what loan rates you qualify for. If you have an impeccable credit score, you can expect to pay a bit over 5%. You can always go to refinancing agencies down the line, once you’re more financially stable, to get a better annual percentage rate.
Pro tip: use an auto loan calculator to play around with these numbers and see how much you’d have to pay.
Figure Out Your Monthly Budget
With that said, you must find out what your monthly budget is. What’s your monthly take-home pay after you’ve covered all expenses (taxes, health care, rent or mortgage, utilities, insurance, food)?
Never go over this budget, unless you want to badly risk your finances. Once you come up with a figure, you’ll have your answer to “How much car can I afford based on my monthly payment?”
How Much Is Too Much for a Car Payment?
Here’s a reliable personal finance rule of thumb: don’t spend over 10% of your monthly take-home pay on car loan payments. For example, if you make $60.000 per year, your monthly payments (including gas and insurance) should never exceed $500. You don’t need a car loan calculator to tell you that.
Since we’re talking numbers, let’s look at how much you’d need to make to buy a $100.000 car responsibly. Say you pay 20% of the total cost upfront and sign a loan with 5% interest rate over 4 years. You’d have to make over $220.000 a year—and that’s not counting insurance and gas costs!
When in doubt, you can always use a car affordability calculator. Enter your ZIP code, credit score, loan term, loan amount, and you’re set.
How Do I Get Preapproved for a Car Loan?
It’s best to walk into the dealership after you’ve been preapproved for a car loan payment plan. It gives you the upper hand when negotiating with salesmen. You’ll be treated like a cash-in-hand buyer.
But getting preapproved isn’t for everyone. Start by contacting a bank or credit union you’re already doing business with. They’ll pull your credit score (beware of any outstanding credit card payments!), monthly income, and look at your records in-depth.
Remember that you’ll only be able to get preapproved if you have a good credit score. Plus, it’s best to get preapproved by different lenders, so you can pick the best option for you.
When Is It Best to Buy a Car?
It’s best to buy a car at the end of the year, during the months of October, November, and December. Dealerships will be eager to finish off their year strong by hitting their quota. This is when they’re most willing to lower the price of a new (or even used) car.
Looking for Alternatives: Leasing vs. Buying
Most people will tell you that a car purchase is always better than a car leasing plan—and that’s true in most situations. You’ll always own it and it can be cheaper in the long-run. But sometimes, leasing might give you an advantage.
If you like switching cars regularly, leasing is definitely the wisest way to go about it. Similarly, if you want to drive a great car but aren’t ready to invest so much money into it, leasing will be a good decision. Lastly, leasing a car means you only keep it for a few years at a time, meaning you won’t have to worry about serious car maintenance issues.
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