Whether you are looking for a fuel-efficient small car, a sporty convertible, or a family sedan, you must face reality. How much can you afford to spend on a new car?
In addition to the price tag, you must consider and such things as sales tax, registration fees, service, and daily costs. And above all, be sure to check with your insurance agent or get insurance quotes online so you understand how your choice of car will affect your car insurance premiums.
Simply put: do your math. Do you have a trade-in? How much will the trade-in give you? How much can you pay up front? Yes, you got it: how much can you put up as down payment.
If you plan to take a loan, what is the maximum payment you can afford every month?
Remember, a higher down payment reduces the amount you need to borrow, which lowers your monthly payments and reduces the amount of interest you’ll pay.
Most financial experts say that your total debt payments shouldn’t be more than one-third of your gross income. That is 33%. Going by this rule, follow these steps:
- What is 33 percent of your gross monthly income?
- What is your current debt payments? (including mortgage, credit card bills, and other loans…)
- Subtract the total of your monthly payments from the 33%.
What did you get?
Look at this example:
If your pretax income is $60,000, total debt payments should not exceed $20,000 a year. If your existing debt payments equal, say, $15,000 a year, you can only afford to pay an additional $5,000 annually, or $416 a month, for a car.
With this number in mind, you are ready to go shopping for your car. And don’t think another 100 dollars or so will make a difference. They will.
Better still, make sure your deal makes your total debt goes lower than 33%. That will give your room to live as well.
Because honestly, what’s the point in living if you can’t live?
No fun, otherwise. Is it?