TMCnet Feature
April 20, 2020

Car Affordability Calculator: How Much Car Can I Afford?

Purchasing a new car can be an exciting and thrilling process. After all, unless you're a millionaire, purchasing big-ticket items can be a huge rush. You walk onto a dealership lot, test drive a few vehicles, and before you know it you have a brand new car. However, the reality of car buying is much less flashy. Instead, purchasing a car should involve quite a bit of forethought, research, and levelheadedness. That's why you should know what car you can afford before you even step foot onto a car lot. Today, we're going to guide you through this necessary process.

Set Up Your Monthly Budget

Before you even begin searching for your new car, you should set up a weekly, monthly, and yearly budget. Your weekly budget should include items such as food and gas. Your monthly budget can be a bit broader. In this budget, you'll include credit card bills, rent (or mortgage), utilities, subscriptions, and insurance.

Your yearly budget should include savings goals, month to month expenditures, and include your expected tax payments or refunds. By tracking your expenditures, you'll be better prepared to figure out how a car payment will fit into your life.

Calculate Your Ideal Car Payment

Experts say that you should spend, at most, 35% of your pre-tax income on a car. In an ideal world, you would spend even less than that. NerdWallet suggests that your monthly car payment should not be more than 10% of your take-home pay. So, for example, if you make $2000 per month, you can only afford a $200 car payment. Use a car affordability calculator to help you calculate your ideal monthly car payment.

Run Your Credit Report

Once you've calculated what car payment you can afford, you'll likely begin looking for a car loan. Before doing this, you'll need to check your credit score. Use a free website such as Credit Karma to find out your credit score, without it being affected. Your credit score will determine how high or low your interest rate and will also influence which financial institution you'll want to deal with. Lenders will look at your credit score as a measurement of risk. So, if you're credit score is low, you'll likely be given a high-interest rate. It's best to go into the loan research stage with your eyes fully open and your expectations realistic.

Calculate the Car Loan Amount You Can Afford

This step is similar to calculating your ideal monthly payment. However, your car loan payment amount will be determined by your credit score, loan term, and whether or not you decide to buy your car new or used. Using a car affordability calculator with this information in mind, you can determine how much can you borrow for a car loan.

Find Your Ideal Purchase Price

Something to keep in mind when purchasing your car is that just because you can afford a $25,000 car if the loan is a five-year loan, doesn't mean you should go for it. After all, if you purchase a $16,000 car with a three-year loan, your monthly payment will be the same as it would be for the $25,000 car. But you won't be spending $2,500 more in interest.

Something to also keep in mind is that the price you see on the sticker is not the total price. There will also be sales tax and fees to consider. To calculate your likely sales tax add on, add 10% to the price of the car. This will help you get a better understanding of how much you're likely to spend.

Finding Your Car

Finding your car can, in and of itself, be a tricky process. If you decide to go with a used car, make sure to buy from a reputable dealership. While you may end up spending a little more than you would with a used car lot, working with a dealership will guarantee that your car has been inspected recently, certified, and provided a warranty. The last thing you want to do is take out a loan for a lemon.

Purchasing a car is an exciting step in everyone's life. However, the last thing you want to do is to go into the process blindly. Make sure you've done the prerequisite research and gained the financial literacy you need to make sure that you're getting the best car loan with the lowest interest rate possible.

» More TMCnet Feature Articles


» More TMCnet Feature Articles