Choosing a Car You Can Afford
You've
decided it is time for a new vehicle, it's an exciting time that
can quickly get stressful when you realize you're not sure what you
can afford. How do you know how much you can spend on a new vehicle?
Here are some things to consider.
The
20-4-10 Rule.
This rule states that you should typically put 20% down, finance the
vehicle for no more than four years, and then not allow your monthly
expense exceed 10% of your gross income. By tuning into these costs,
you can align your potential vehicle with what you can afford to
buy.
Use
a Car
Affordability Calculator.
This tool on Money Under 30 allows you to input your monthly income
(before taxes), monthly cost of insurance, interest rate, down
payment, trade-in value (optional) and length of your loan to
determine how much you should spend on a car. It's a very neat
resource to have at your fingertips.
Do
the math.
Consumer Reports has a rule of thumb that your total payment be no
more than 36% of your gross monthly income. Sit down and figure out
what 36% of your monthly income would be, then calculate your
monthly bills (including your mortgage/rent, credit cards, utility
bills, and anything else you are paying monthly). Subtract the total
of your monthly bills from your 36% calculation. This is the maximum
you'd be able to afford to spend each month on a car payment.
Obviously you want a little wiggle room in case other expenses come up, so it's smart to take that into account!Â
Know
the extra costs in buying the vehicle. Don't
forget to take into account that your vehicle cost will end up being
more in the end, namely because you will need to add in sales tax,
registration fees and insurance premiums. These costs can add up to
10% more to your total vehicle expense so figure that in when you
are running your numbers.
Once you know how much you can afford each month, you can use tools like the dealership's Auto Loan Calculator to run numbers on vehicles, interest rates, and term length. You don't want to get in over your head on payments, that's why it's wise to ensure you have enough set aside in your finances each month to cover the costs of your new vehicle. With these tips, you're all the wiser in purchasing your new vehicle. Use Caitlin Chrysler Dodge Jeep RAM's Payment Estimator as a resource. If you search the dealership's new inventory you can also set the price range you are looking for on the left side of the screen if you scroll down a bit.