Auto Ninjas How Much Can I Afford?
April 21, 2021 , Katrina Lubiano
How Much Can I Afford?
Do you dream of owning a nice car but feel uncertain over whether you can afford one? The answer is simple - you’ll have to first perform a self-assessment on your income level and living expenses, then understand the kinds of purchasing and financing options available. In this article, we’ll take a deeper look into the key steps involved in financing a car to help you get your dream ride.
1. Consider Your Monthly Income
You can use your net monthly income as a guide for determining how much you can pay for a car every month. First, determine how much of your income is usually left over by the end of the month, and subtract your monthly living expenses from your monthly income. This could include:
The remaining amount will represent how much you can spend for car payments. This should be equivalent to 20% or less of your monthly take-home pay.
However, i' be good to still have money left over even after you pay for your car every month. You could look back and see if you can make any adjustments to your regular spending.
2. Review Your Spending Patterns
One of the ways to figure out what type of buyer you are is by taking a closer look at your purchasing habits and plugging your expenses into this quick and easy calculator. If you are thinking of saving money by leasing a car, instead of financing, our site provides some great deals!
For instance, if you tend to save money for big purchases, like a car, then yo'e more of a cautious spender, which increases your likelihood of being able to cover the cost of car payments. However, if you spend a lot, or have debt due to your purchasing habits, then ther' a high risk yo'l struggle to make monthly car payments.
3. Consider Your Living and Working Conditions
I' important to think about how you plan to use your car and what type of car makes sense for your lifestyle.
This means considering whether you need a minivan, sedan, SUV, convertible, hatchback, wagon, pickup truck, crossover, station wagon, or van conversion. You can decide on this based on where you live and work. Several questions to ask yourself include:
- Do you commute to an educational institution or office daily?
- If you have children, will you be driving them to school activities or other places?
- If you have a garage, how big is it?
- Is parking in your area easy or difficult?
How to Calculate Your Automotive Budget
After performing the three steps mentioned above, yo'e more prepared to start determining your automotive budget. Edmunds has a great resource for used car calculations and our site includes lease deals for any budget: Next you should calculate all the costs associated with ownership, which could include:
- Maintenance - Some leases include maintenance, here is a full breakdown!
- Repairs - If it is a new car this will be covered by warranty!
The budget may be constrained by how much money yo'l have left over after all of your monthly expenses, which should be 20% or less of your monthly take-home pay. Therefore, if, based on your budget, you decide to take out a loan to finance your car, make sure that you have enough to pay for the monthly loan repayment and interest. Determining fuel and insurance costs
You can use online tools like GasBuddy to help you research.
These types of sites allow you to enter information about your vehicle, such as its model and manufacturing year, and, in return, yo'l receive estimates on how much yo' have to pay for fuel and insurance.
What Are My Purchasing Options?
A lease allows you to use the car, provided that you make monthly payments to the individual or company yo'e leasing the vehicle from, within a lease period.
A lease period is agreed upon between you and the lessor in the beginning. The car will, in many cases, be returned when the period is over. Sometimes, however, leases have positive equity at the end of their lease which can even put some money in your pocket. You can check by using the sell your car tool and comparing it to the contracted residual value!
The monthly lease payment that yo' have to pay can be reduced if the lessor allows you to put down security deposits. However, these can reach hundreds to thousands of dollars and yo' have to pay it upfront.
2. Buying a used car
Used cars tend to be much cheaper than new ones, making monthly payments more affordable.
Make sure to properly consider maintenance costs for specific brands and also consider if it comes with a warranty or not! A warranty protects you against problems such as transmission issues or brake failures and ensures that you do' pay out-of-pocket for repairs. This is one of the reasons we suggest leasing a car!
Also, determine the car mode' fair market value to see if the price set by the seller is reasonable.
3. Buying a new car
You might not feel comfortable with the idea of driving a car that used to belong to somebody else.
One key thing to remember is that, when shopping for a new car, do' just focus on the price!
Take into account other factors, such as whether it is more fuel-efficient, or if it is highly rated. This would allow you to save on fuel costs in the long-term, compared to if you were to buy an older used model, where the vehicle may be cheap but costly in fuel.
What are My Financing Options?
When it comes to financing a new or used car, there are a few options available to you. Some of them include:
1. Bank or credit union
A bank or credit union can loan you money, either at a fixed or variable rate; a fixed rate is a set amount while a variable rate fluctuates according to market conditions.
With a variable rate, banks and credit unions typically charge a different interest rate depending on whether the prime lending rate goes up or down. If the prime lending rate rises, the interest rate on your auto loan might go up too, and vice versa.
If you have a good credit score or a good track record, then yo'l have better chances of taking out a larger loan for a car. Furthermore, you could get lower rates or special deals from the bank/credit union.
2. Buying from a dealership
Most auto dealerships, especially ones affiliated with manufacturers like Toyota, work with lending partners that arrange car loans for eligible customers. Some dealers also offer loans through larger financial institutions such as Wells Fargo or Chase.
When you sign up for a car loan at a dealership, the lender will send your monthly payments to the partnership bank or finance company that backed your loan. Your vehicl' title will go directly to the lienholder or bank, where i'l remain until you pay off the loan.
To Sum Up: Spare Around 15% of Your Take-Home Pay
When planning to buy a car, take into account the amount of money you have available to spend for monthly car payments, as well as the cost of ownership. This should be about 15% of your monthly income, after tax and insurance.
Cost of ownership includes factors like car insurance, repairs and maintenance, and fuel.
Remember that, if you plan to finance your purchase through a loan, make sure that the monthly repayments do' take up a significant amount of your monthly income. This could lead to issues in the long-term and you might find yourself drowning in debt. So do your due diligence, as always, before moving forward with any purchasing decisions.
Contact us today to discuss your car needs!