Your Essential Guide to Determining How Much You Can Afford to Pay for a New Car

Buying a new vehicle is exciting, but in the midst of all the excitement of looking for the perfect vehicle, you shouldn't get too carried away – after all, there's your budget to consider. No matter how much you want to purchase the car of your dreams, it may be wiser to hold off on that purchase until you can really, truly afford it. But how do you know what you can afford in the first place? Even if you have your mind set on a specific model, you should still be as practical and economical as possible if you don’t want to end up with a decision you will regret in a few months. Here, then, is your essential guide to determining how much you can afford to pay for a new car.

Your best bet

Your best bet when it comes to the appropriate budget is knowledge of certain percentages. What percentages, you may ask? Well, first of all, when you buy a new car, the monthly payment for the car shouldn't be more than 15 per cent of your gross income or 20 per cent of your net income (the total amount you take home after taxes). Here's another percentage to bear in mind: when you buy a new car, your down payment for the vehicle shouldn't be less than 20 per cent of the car's actual price. Of course, the higher your down payment for the vehicle, the better, as the lower your interest rate will be. And if you are opting for a car loan (as many of us do), the car loan's term shouldn't be more than 48 months or four years.

For instance, if you have a gross income per month of $5000, your monthly payments for the car shouldn’t be over $750. If you get a loan for 48 months with an interest rate of 6 percent, you can get financing of up to $32,000, and if you have a down payment of at least $6500, your total budget for your new car would then be $38,500. Make sure, though, that your job is stable, and you will have no problems paying the monthly fee for the car loan – and paying it on time.

Do you want to trade?

If you have an existing car and you are thinking of a trade-in deal, there are some factors you should think about as well. You should first determine your existing vehicle’s value minus any outstanding loans you still have on it. Remember this: a trade-in only works well if your current car has a higher value than the debt you owe on the vehicle. This means you will have equity, as a reputable Dodge dealer in Wyoming like Rocky Mountain Yeti Evanston will tell you. So, if you have a car that is worth about $10,000, but you still owe $5000 on it, your equity in the car will be $5000. You can then use this equity of $5000 for purchasing your new vehicle.

Be careful with monthly payments

We can’t stress this enough: make sure that you can really afford the car’s monthly payments. As already stated, your monthly payment shouldn’t exceed 15 percent of your gross income (or 20 percent of your net income). The amount you are comfortable paying will depend on you, and it can be higher or lower than this, but it’s best to stay safe and be as honest as possible with yourself so you can make a decision on the monthly payment that you can afford. Keep in mind that the insurance for the car will be an additional 15 to 20 per cent on top of your monthly car payment as well.

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