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So you are facing a big financial decision and buying a car. Aside from what type of car you want to have, the first thing you need to find out is what you can comfortably afford.
Although buying a car is faster and often easier than taking out a mortgage, you still need to budget for costs beyond the sale price of the car, such as fees and taxes on acquisition and insurance payments. We’ll show you how to prepare to buy the right car without breaking the bank.
3 Steps To Determine How Much Auto You Can Afford
The average cost of owning a car is more than $ 5,264 per year, which is nearly $ 440 per month, according to Move.org. However, this cost can vary by state (Michigan tops the charts averaging over $ 9,300 per year or $ 775 per month). So you need to make sure that you can afford a car on a monthly basis, not just at the time of purchase. Here are some basic steps to help you check your budget ahead of time.
1. Calculate your monthly net income on debt
One of the very first steps you should take is to compare your monthly after-tax income (net income) to your monthly expenses. Determine your net monthly income after paying off existing debts such as credit cards or mortgages, utility and insurance bills, and all health, childcare, and average living expenses. This should give you a clear picture of your cash after all of your obligations have been met each month.
It is more important to focus on the type of car you can afford than the one you want. Because if you can’t buy the car right away and can’t make payments for a car loan, the lender can repossess your car.
Financial planners recommend limiting your car loan to 15% of your net monthly income. Gas, insurance and maintenance also increase your costs by a few percentage points.
For example, if your monthly takeaway salary is $ 3,000 per month, the 15% threshold would allow for a monthly car loan payment of $ 450. By capping your auto payment to 15% of your net monthly income, you likely still have some savings to cover sudden expenses, such as: B. when the car needs to be repaired.
2. Check your credit history
How much you pay for a car loan in terms of annual percentage rate (APR) depends on your creditworthiness. The higher your score, the less interest you will pay on a loan.
Your FICO credit score is determined by: your payment history; amounts owed; Length of credit history; new credit and credit mix. The FICO score is based on credit reports from the three major credit reporting agencies: Experian, Equifax, and TransUnion.
To understand where you fall in the FICO credit score range of 300 to 850, check your score for free.
3. Evaluate your additional cash for the deposit
The deposit for a car is the money out of your pocket. While there are some auto dealers and lenders who offer no down payment financing, it is better to leave some cash on hand to cover fees and taxes upon completion and / or to reduce the loan amount. If you put some cash on it, it will also shorten the overall duration of the loan.
For example, let’s say your budget is $ 20,000 and you’ve found a vehicle at that sale price. If you borrowed $ 20,000 at 4% APR and paid off the vehicle over 60 months, your monthly payment is approximately $ 368. At the end of 60 months, you have paid a total of $ 22,100, including $ 2,100 in interest.
If you had a $ 3,000 down payment, your monthly payment would drop to about $ 313 and the total loan plus interest for the life of the loan would be only $ 18,785.
How to explore your financing options
Start with your bank or savings bank
Traditional lenders like a bank or credit union are a great place to get a car loan as they often have lower interest rates or special offers for the customers who already do banking with them. You can also get a pre-approval letter from your bank or credit union before you start looking for a car to get a better idea of what you can afford.
It’s a competitive market among lenders, so try to get at least two to three quotes from different lenders. It also helps your negotiating position.
This is especially true if you are already a customer of the bank or credit union and have a good record of borrowing from this institution. They can do a quick assessment of your financial history and credit profile as they already have them in their system. If all goes well, they can send you a letter telling you how much money to borrow that you can use to buy a car or negotiate a better deal with other lenders.
Consider credit through a dealer
Car dealerships, especially if they are affiliated with manufacturers such as Ford, General Motors, Honda or Toyota, have access to private lenders who arrange loans for qualified borrowers on site at the dealer. But in addition to these well-known creditors, most car dealerships also have access to national and regional banks that offer car financing.
In most cases, when you take out a loan from the dealership, you are transferring your monthly payments to the partner bank or finance company, rather than the dealership where you bought the car. When you have paid back the loan, the financial institution will send you the title of the vehicle.
Set your target price and shop around
After carefully examining what exactly you can afford and having a pre-approval letter for a loan, you can now confidently track a number of vehicles within your target price. Fortunately, most first-time car purchases online can be done at home.
The Covid-19 pandemic and restrictions on businesses forced many car dealerships to revamp and improve their websites, from just listing inventory and generating leads, to the entire process of selecting a vehicle, securing funding, and delivering Completion of the transaction.
This enables buyers to search for new or used vehicles online from local dealerships without ever leaving their homes. There are also online aggregator websites like cars.com, cargurus.com, carfax.com and others to help you find and often complete transactions. These searches also allow you to search nationwide, not just nearby, and dealers sometimes list the fee to get transportation to you when you buy the car online.
App-based companies like TrueCar, Carvana, and Vroom have digitized the process, including financing with multiple lenders and features like a seven-day test drive.
Buy from a dealer
Today’s car buyer is tech savvy, as are car dealerships. More and more car buyers come to the dealership with an exact car because they have already visited the dealer’s website and searched the inventory to find the right vehicle.
In other words, consumers now have more choice and control, from budgeting to purchasing a vehicle, to find the right dream car that also fits their personal financial profile.
