If you’ve decided to buy a new to you car, a typical first step is to determine how much you can afford. Everyone deserves a safe and reliable car that can get them around. However, it’s important to know how much car payment you can afford.
Cars aren’t cheap, and trying to determine what you can afford isn’t always simple. If you’re wondering what your car payment should be, or how much you can realistically afford, this guide will help.
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How Much Should Your Car Payment Be?
Car payments are a necessary evil for most people. Many struggle with the question ‘How much spend I spend on a car?’ and overextend themselves.
Here’s how to determine how much your car payment should be and save more on your next car purchase.
No Car Payment is Best
While a car payment can be affordable, that doesn’t mean it’s always necessary. If you can buy a car with cash, it’s one of the best decisions you can make.
Besides saving on interest, it frees up cash to apply towards other financial goals. However, paying for a car outright isn’t possible for everyone.
Sometimes things happen, and not everyone has the ability to pay cash for a car. So, if a car payment is your only option, that’s okay. Here’s how to keep your budget in check.
Know Your Budget
You should know how much car you can afford before you even step foot outside your house. To determine your car payment, take a look at your budget and see what wiggle room you have.
If you don’t have any wiggle room, find a way to cut costs so you can afford your car.
A car payment isn’t the only expense associated with owning a car. You will also be responsible for:
- Annual taxes
- Insurance coverage
- Gas costs
- Repair costs
These are all normal costs associated with owning a car, so don’t forget to budget for them along with your car payment.
Once you look at your budget, you’ll have a better idea what you can afford. For example, if you have about $400 in wiggle room, your car payment should be no more than $200-$250.
That way, you can also afford insurance, gas, and maintenance costs.
Follow the 20/4/10 Rule
Besides looking at your budget, you should also follow the 20/4/10 rule when buying a car. Here’s how the 20/4/10 rule works when buying a car:
- 20 percent down payment for the car
- Finance for four years or less
- The car should not exceed ten percent of your gross income (and that’s including principal, interest, and insurance)
For example, let’s assume you make $3,000 per month and buy a $10,000 car. Following the 20/4/10 rule, you would need to put $2,000 down, and have a 48-month loan for the remaining $8,000.
Then, you’d have to make sure that your monthly payments don’t exceed $300 a month.
If you’re trying to do the math for a new car and it doesn’t work out according to this guideline, you need to decrease the car budget or save additional money.
You may want to consider opening a high-yield savings account to grow the funds needed for a down payment for a car.
CIT Bank is a great option, paying .40 percent in their Savings Builder account. To receive that interest rate you must open the account with at least $100 and deposit $100 each month.
They even let you automate transfers so you can grow your down payment fund quicker.
If you’re afraid your rate will be high, or you have a low credit score, a credit builder loan can help mitigate the situation. You should only pursue this option if you can wait at least a year to buy a car.
If you can wait that long, a credit builder loan can improve your credit score, and help reduce the potential interest rate on your auto loan.
Here’s how a credit builder loan works: a bank lends you money and they deposit the funds into a savings account in your name.
You make monthly payments, typically no more than 24 months. The amount is small and usually between $500 – $1,000. Once you’re done with payments you receive the cash in the savings account plus any interest.
The bank reports your payments to credit bureaus, helping improve your score. You can receive a credit builder loan at your bank, but it’s best to look online for the best rates.
Credit Strong and Self Lender are the top choices in the space. You can even pay off your loans early if you want.
Read our Self Lender loan review to learn more about the service.
Don’t Just Look at Monthly Payments
When looking at a car payment, don’t just look at the short-term. Many people may think they can afford $200 payments every month, but can you afford $200 for five or more years?
That is just one question to consider. Here are other questions to consider before buying a car:
- What if you lose your job?
- What if the car breaks down and you needed to buy another one?
- What if the car is totaled and insurance doesn’t cover the full loan?
A lot goes into calculating a car payment, including the annual percentage rate (APR), the length of the loan, and the total loan amount.
Think about it this way. You could buy a $10,000 car and pay it off in four years or less if you were paying $300 a month. But buying a $20,000 car means you’d be paying $300 a month a lot longer.
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Sure, the monthly payments are the same, but buying a $20,000 car will take you a lot longer to pay off and you’ll pay considerably more interest.
When trying to see what you can realistically afford, don’t look solely at the monthly car payment. The dealership will try to hook you with that, leading you to finance the car for longer.
Keep in mind your total budget, how long you want ti to take you to pay off the car, and think long-term. “But it’s only $150 a month!” is not the same as saying “It’ll take you seven years to pay this car off at this rate!”
It’s also important to shop around for car loans. Compare rates between your local financial institutions and the dealer. The lower your rate, the less you pay in interest.
You can even compare rates at LendingClub to see if they offer lower rates.
See If You Can Pay More
Once you know what your car payment should be and how much you can realistically afford, see if you can find a car that’s in, or at least closer to, your price range. That way, you can make the same amount of payments but you can pay off the car faster.
For example, if you have a $10,000 budget but you find the perfect car for $8,000, you’ve technically already saved $2,000. But, if you were budgeting $300 a month for the $10,000 car, and the $8,000 is only $250 a month, you can still pay $300 a month and pay off the car in even less time
If you’re paying the average monthly car payment of over $500, this will be a challenge. However, if you keep the purchase price down, it’s simpler to accomplish.
Look Online First
Before you even head to a dealership, research prices online. The internet has a plethora of car sites that you can use to compare car prices, car ratings, and more.
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On most car sites, you can input your budget, what you’re looking for, your location, and other details to find a car you can afford.
Edmunds.com is a great option to use to research cars in your area. You can sort via your location, budget, and make and model of the cars you’re considering.
If you want to look at all of the cars near you, you can do that, too. You can also sort by mileage, whether the car is a good deal or not, and other factors.
Once you have some ideas in mind about the cars you like and how they fall into your price range, you can start going to dealerships.
Don’t Be Afraid to Negotiate
The day has come. You know your budget, you know how much car you can afford, and you know what your car payment should be. Communicating that in a way the dealership will accept is a task that’s generally easier said than done.
The salesperson may try to talk you into a bigger car, or a more expensive car. They may even try to get you into a car that you know isn’t the right fit for you.
To stick to your budget and your predetermined car payment, do not be afraid to negotiate. Don’t be afraid to walk in and say “This is what I can afford, take it or leave it.” They want your money and most dealerships will work with you to get that sale.
This is why looking online first can help you. You’ll know what’s a fair price, what kinds of cars you like and can afford, and what you’re willing (or not willing) to negotiate on.
If you do find a car that’s out of your price range, try to negotiate the cost. Again, some dealers are pushy, and they may try to use scare tactics or pressure you into a sale. However, a good dealer will work with you and try to get you what you can afford.
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At the end of the day, be willing to walk away. There are likely other reputable dealers in your area, so don’t settle on the first one you visit. Once you know what your car payment should be, and what you can afford, don’t be afraid to negotiate or say no if you have to.
Bottom Line
Your car payment should be what you can realistically afford without busting your budget. While not having a car payment is awesome, if you need a car payment, it shouldn’t cause you financial stress.
After doing research, decide on a budget that works for you, and then get started finding a car that you love and can afford. A car payment doesn’t mean the end of the world, and there are ways to get a nice car without overspending.
Just make sure not to overextend yourself. You don’t want to be making payments beyond the car’s viability.
What are your thoughts on car payments? How do you save money when buying a car? What do you look for when buying a car?
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