If you buy a car, you probably realize howare nowadays. This is a fairly recent development as prices are increasing due to high demand and far too low supply. It might take some time for prices to start falling due to supply chain issues. That’s okay, because the tips we have for you will work for any new car market. Even though you can finance a big car, read on to make sure you make the right choice when pulling the trigger on a new vehicle.
However, it takes more than looking at a car’s MSRP to understand if you can afford it. Most of us budget monthly, so we’ll walk you through how to see if a car payment is working for you. Read on for our tips and advice to make sure you don’t overspend on a new or used car. That way, when you sign the papers, you can drive home with your new car knowing you’ve made the best decision possible.
Define a monthly number
It might sound obvious, but the first step in determining how much you can spend on your new car is to calculate your monthly budget. Add up all of your monthly income, subtract the expenses (from rent or mortgage payments to food and health care) and see how much you have left. For your benefit, the Federal Trade Commission even offers a example of online budget sheet.
But don’t spend every penny of your disposable income on a car. Instead, experts have developed guidelines for how much is reasonable to spend.
In the old days, advisers would sometimes recommend what was called the 4/20/10 rule: make a 20% down payment, have a loan no longer than four years, and don’t let the payments exceed 10% of your gross income. But these numbers are unrealistic for buyers today. Part of the reason is that car loans last much longer: In March 2020, the average car loan was over 70 months, according to Edmunds research.
Today, experts generally recommend spending no more than 15% of your monthly take-home pay (this is the amount you receive after taxes and other deductions). Depending on your budget, spending closer to 10% might be a more reasonable guideline.
Based on these rules, a person with a net income of $ 3,000 per month might consider a payment of $ 300 to $ 450 per month, figures that represent 10% and 15% of their take-home pay, respectively. If you’re not looking for a luxury SUV or pickup truck, that’s usually a good number when shopping for new, more affordable cars.
However, it is important to note that you are not only responsible for paying for the car. Also factor in insurance costs when calculating your total monthly car expenses. Don’t let the combined cost of insuring and paying for the car exceed your rule, whether it’s 15% or whatever. For this reason, choosing a base car payment that is closer to 10% to 15% of your net income is a safer rule to make sure you don’t blow your budget.
For this reason, many advisers recommend setting a limit on the total amount of your car spending per month instead. For example, you can decide not to spend more than 15% of your total take-home pay on your loan repayment, insurance and gasoline costs combined. This can be an especially important rule for buyers who already have other debt.
Calculation of the monthly payment
Once you know how much you can afford to spend, it’s time to figure out how much you would pay for the car you want. New car listings and review sites usually only list the total MSRP (Manufacturer’s Suggested Retail Price), so you’ll need to convert that to a monthly figure. Most car manufacturers offer a loan calculator on their consumer websites. Simply enter data such as your potential down payment and interest rate, and the site’s calculator will tell you approximately how much the loan would cost per month.
We also have a loan calculator available on the Roadshow website. Enter the amount you want to pay per month, along with details like your expected loan term, interest rate, and other details, and our calculator will help you determine how much car you can afford. to buy. You can also go the other way with our basic loan calculator, entering a car’s sale price and other data to calculate an approximate monthly payment number.
Keep in mind that interest rates vary widely depending on your credit history, your down payment, and whether you are financing directly through a car manufacturer or your bank or credit union. Rates generally remain low at this time, but obviously this can vary widely from person to person.
Other things to consider
There are more costs to owning a car than just the payment and insurance. You should also budget how much you will need to spend on gasoline and maintenance, although a new car should be covered by warranty for most of the loan period of a new car.
Also consider the length of your auto loan. While longer loans will usually give you a lower monthly payment, you will pay more interest charges overall. Plus, longer loans increase the length of time you’re “underwater” on the new car. This is the situation, more formally known as negative equity, when you owe more on your loan than the car is worth if it were sold. And that can make it more difficult to sell or trade in the car.
Finally, remember that these guidelines can and should vary depending on your situation. If you don’t drive a lot or spend a lot of your income on housing costs, you might prefer to spend less per month on your new car. If you are a car enthusiast or need a very specific vehicle for your work or travel, you may want to stretch your budget a bit more. Overall, for most people, spending 10-15% of your take-home monthly pay on a new car loan is a good course of action.