How much car can you afford?

 

Run the numbers with our calculator to shop with confidence

You want to buy a great car for your budget as well as for you, the driver. That’s a solid plan. And an easy one, right? There are plenty of commercials telling you how affordable it is to get into a new or pre-owned vehicle. Many of those may be good options but, wherever you go to buy your next vehicle, you’ll be able to do so with more confidence if you work out how much car you can afford yourself.

If you’re financing the purchase, like most buyers, it starts with figuring out what’s available in your monthly budget for a car payment and those other auto-related expenses, including insurance, gas and maintenance.

Take all your monthly expenditure into account, such as rent or a mortgage payment, utility bills, food and entertainment, perhaps with the help of a budget worksheet, to see what you can accommodate. Now you’re in a good position to work out a potential loan amount with an affordability calculator.

The old 20/4/10 rule for auto-ownership affordability, with a 20 percent down payment, four-year loan and no more than 10 percent of gross income going toward the loan and insurance, is no longer feasible according to Consumer Reports. That’s partly because average car prices, and payments, are rising, although buyers are opting for longer loans to keep their payments down.

So with the calculator before you, type in your desired monthly car payment along with the loan term in months, APR, and down payment to get an estimate that works for you.

 

As most people buy pre-owned rather than new, let’s see what a potential used car loan could look like, for example. Entering a payment of $371, the average for a pre-owned car; a loan of 60 months, close to the average five-and-a-half-year term; four percent APR, and a down payment of $2,000 suggests an affordable loan amount up to $22,145.

When entering loan duration, bear in mind that, although extending a loan term is one way to reduce a monthly payment, a longer loan means paying more in interest charges than with a shorter loan of the same APR. Lengthy loan terms may also pose a greater risk of the owner becoming upside on a car, when the value of the vehicle is less that the amount owed on the note.

What should you give for a down payment? Money down reduces the amount you’ll need to borrow as well as interest paid over the life of the loan, so a good chunk can really help. While the advice has been to aim for 20 percent of the purchase price, the average down payment is actually much lower, standing at just 10 percent for new and used cars in 2015.

If you have a car to trade in, the trade-in value can also be entered into the calculator as part of the down payment. Look up the trade-in value of your vehicle to get a good idea of what you can expect to get for it. Alternatively, you might want to sell it privately, and look up the private-party-sale price.

Sometimes buyers still owe money on the car they’re trading in, in which case the dealer could offer to rollover the balance into financing for the new vehicle. That might also lead to negative equity, and is something to consider, too.

 

What your loan amount can cover

Don’t forget what you’ll pay for a car doesn’t end with the sticker price. Additional costs like sales tax, title fees, registration and any add-ons you may want – such as a service contract or keyless entry – will bump up your final figure. You may want your loan amount to cover all of this.

 

What if you’re having trouble keeping to budget?

If your loan estimate isn’t dovetailing with your budget, try these tips from the Consumer Financial Protection Bureau to reduce its cost:

• Save for a larger down payment
• Buy a less expensive car
• Get fewer add-ons
• Improve your credit score

Credit score is typically a major factor for lenders making decisions on auto loan applications, and the terms offered, including the APR. Consumers with better credit generally have a better chance of approval and lower rates.

Checking your credit reports and disputing any errors, then practicing good credit habits such as paying your bills on time, are among the steps recommended to improve a score.

 

Empower yourself with a preapproved loan

Another smart way to stay within budget when buying a car is to get preapproved for financing. An online lender like RoadLoans enables you to apply for an auto loan in your own time and get an instant decision. If approved, you’re empowered to shop like a cash buyer, already knowing just how much car you can afford and the terms of your loan.

RoadLoans provides its customers with multiple loan offers tailored to their unique needs. Just select the best option, download your loan packet and visit your recommended dealership nearby. Alternatively, use our dealer locator to find another.

We work with 14,000 auto dealerships able to show you select new and used vehicles meeting our high standards for quality, so you can buy with confidence.

 

Peace of mind

The luster of a new vehicle means it’s easy to rush into a purchase but, with some careful planning, knowing how much car you can afford will help you arrive at a good choice for the years of ownership to come.

 

Written by: Rob Looker on July 27, 2018