Buying a car is like jumping into a lake. Without some planning and research into what you might encounter, you could be in too deep before you know it.
Relax. You're going to be prepared. If you take the car buying process one step at a time and put some time into researching your purchase and your finances, it will go much more smoothly.
There's no sense getting all worked up about a car you can't afford. So save yourself some disappointment and figure out a payment amount you can handle before you start looking.
Start with your budget. (You do have a budget don't you? If not click here for budgeting information.) How much room is there in your budget? Could you, for example, fit an extra $200 a month in your budget without strapping yourself too much or eliminating your savings? If so, can you fit an extra $300 a month in your budget? No? How about $250? Continue that process until you have a general idea of how much you extra room you have in your budget. That's how much you can afford to pay for a car every month. Operating expenses can be as much as one third to one half of the monthly cost of a new car. So take the amount that fits in your budget and multiply it by .66. That is the most you should consider spending on monthly payments for the vehicle to be able to afford operating expenses as well.
Remember that your expenses will include not only your car payment, but also your insurance, gas, maintenance and other miscellaneous costs associated with operating a vehicle. As a general rule, the more expensive the car, the more it costs to insure and maintain it.
The 20-10 guideline
Never borrow more than 20% of your yearly net income
If you earn $400 a month after taxes, then your net income in one year is: 12 x $400 = $4,800 Calculate 20% of your annual net income to find your safe debt load: $4,800 x 20% = $960 So, you should never have more than $960 of debt outstanding. Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 20%.
Monthly payments shouldn't exceed 10% of your monthly net income
If your take-home pay is $400 a month $400 x 10% = $40 Your total monthly debt payments shouldn't total more than $40 per month.
This is going to hurt so let's just get it out of the way — you're going to need a big chunk of change for a down payment. How much? The bigger the better.
A dealership isn't going to give you a car with only a signature as a promise you'll pay for it later. But cash is a great symbol of your commitment to make all the payments. That's the basic idea of a down payment.
To get a loan for a car, and often for a lease, you'll probably need to make a down payment of around 10% of the total price of the vehicle. The larger your down payment, the smaller your monthly payment will be and the less you will pay in total for the car in the long run. But make sure you don't break yourself or deplete your savings account with too large a down payment.
We'll discuss exactly how a down payment affects your financing and monthly payments later on. But for now it's important that you know you will need a large sum of cash when you buy a car. If you can, delay purchasing a car so that you have some time to save up a decent down payment.
Now that you know how large a monthly payment you can afford, you can start looking to find out how much car that will get you.
Remember, owning a car can be expensive. You should consider all of the following before making that purchase:
Costs of Owning a Car
Costs of Operating a Car