How much money have you stashed away to meet your evolving transportation needs? Are you planning to trade in a vehicle that you currently own? Exactly how good (or bad) is your credit?
A wide range of financial factors can affect your target price range as you search for your next car. And it is extremely important to consider all of these factors in order to determine exactly how much car you can afford to buy.
The Basics of Setting the Appropriate Car Price for You
What’s the shortest answer to the question “How much should I spend on my car?” Well, it is probably less than you think. In any event, you don’t have to be a financial genius to know that a lower priced care is going to be far better for your pocketbook than a more expensive one.
When it comes to total automotive costs on an ongoing basis, individuals and families should typically devote less than 10 percent of their take-home pay to car loan payments and less than 20 percent to total car expenses, which encompass everything from fuel and insurance to maintenance and repairs.
When the time to buy a new vehicle arrives, most experts recommend that consumers spend between 10 to 50 percent of their gross annual income on that purchase. But where should you set your price point within that admittedly sizable range?
As we have already discussed, there are numerous factors that affect the bottom line of financially responsible car buying. Broadly speaking, however, you should avoid spending more than 35 percent of your annual income before taxes on any vehicle. This means that your monthly car payments, as well as the money that you put down for a down payment, should generally never reach 36 percent of your pre-tax income during any fiscal year.
Calculating a Car Loan That You Can Afford
After you’ve given a bit of thought to your down payment and overall automotive costs, you can effectively calculate the specific amount can afford to borrow for your car. Determine a realistic target price for your new automotive acquisition by taking the following two steps.
- Calculate a car payment that you can afford – While we have already discussed the importance of keeping monthly car loan payments as low as possible, it is important to keep the overall term lengths of your car loan relatively low as well. Although securing a longer loan term might lessen each monthly payment, you will ultimately pay far more in interest. In some cases, this may cause you to go upside-down on the loan, owing more on your car than it is actually worth. For this reason, you should generally limit loan terms to less than 36 months if you are buying a used car and less than 60 months if you are buying a new car.
- Calculate the car loan amount you can afford – Beyond your appropriate monthly car payment, you must take a number of factors into consideration to determine your final car loan amount. These include your credit rating, your desired loan term, and whether you are purchasing a used car or a new one. All of these elements can greatly influence your annual percentage rate (APR), which determines your overall interest expense.
Whether you need a new or used vehicle, Firefighters Credit Union can help get you behind the wheel. We offer great rates and a variety of terms you can choose from. For further advice and information on auto loans, give us a call here at Firefighters Credit Union 608-784-9480.
