This is about the most important question when you go shopping for either a new or used car. When you want to buy a car you need to consider certain factors such as what you can afford for a monthly payment if you are going for an auto finance, insurance, auto-related expenses such as gas and maintenance among others.
According to Consumer Report, the old 20/4/10 rule or formula for auto-ownership affordability which stands for 20% down payment, 10% of gross income dedicated to the loan and insurance is no more feasible. This is because the prices for car and payments are on the increase every day, although most buyers now prefer to keep their payments longer by opting for longer loan duration.
In order for you not to heap more financial burdens on yourself, you need to consider your monthly expenses by taking into account utility bills, entertainment, food, cost of rent or mortgage when you are calculating how much you can afford monthly for to service a car loan. You can make use of a budget worksheet and an affordability calculator to get an accurate estimate of what you can afford.
With the calculator, you can type in your desired monthly car payment together with the loan term in months, down payment, and APR in order to get an estimate that will be realistic for you.
What Can I Afford for A Down Payment?
When you make a down payment, you will be able to reduce the amount of money you need to borrow and the interest rate can become more affordable Hence, the ability to make a significant down payment will go a long way to help both yourself and your lender. An ideal down payment amount can vary depending on the individual who is borrowing the money. However, a down payment of at least 20% will be good enough.
Learn more about down payments from https://www.creditkarma.com/auto/i/car-down-payment-benefits/.
Trade-in your Current Car
If you have a car to trade-in, then that can also help. Find out the trade-in value of your car in order to get a good idea of it’s worth and know how much more you have to pay for the new car. Another way to go about this is to sell your car on your own and use the proceed as down payment for the new car you wish to buy.
What your Loan Amount Entails
You should note that the price you will pay for your car will include additional costs such as title fees, sales tax, registration, and add-ons such as keyless entry or service contract. All these will add up to the entire cost of the car you wish to buy and you should put them into consideration when you go shopping for a car within your budget.
If you are finding it difficult to keep to your budget, then you can try the following tips as stipulated by the Consumer Financial Protection Bureau;
Go for a used or less expensive car
Save to make a larger down payment
Get fewer add-ons
Work on improving your credit score.
These tips will go a long way in helping you work around your budget when you go shopping for a car of your choice.