You need a car, but when you look at your budget, you’re not sure what kind of down payment you should make or how much you can afford to pay each month. Maybe you haven’t made a car payment in a while. Or maybe you have been making a payment all along and it’s been putting a damper on your budget. Before you strap yourself into a new car, take a minute to figure out how much car you can afford and still live comfortably within your means.
How much you can spend on a vehicle, based on your salary
The general rule of thumb is to spend less than 45% of your gross income (before taxes and other deductions) on total debt, including credit cards, loans, rent, property taxes, etc. Calculating how much you can afford is simple. You can use an online calculator or do it yourself with the following calculations:
- Calculation to determine total debt payments per month – To determine how much debt you can take on per month, you can multiply your annual salary by 45% (.45) and divide that amount by 12. Or to calculate by month, multiply your monthly salary by .45
- Calculation for determining car payments per month – Now that you know what you can spend on debt each month (we’ll use $1,125 from the example above), you need to figure out what portion can go toward your car payment. You are calculating debt only, so don’t worry about groceries, utilities, or other household expenses.
Leasing vs financing
Leasing a car usually has a lower monthly payment because you’re not buying it. If you want to buy it later, you’ll have to pay a portion of the total cost of the vehicle. If you only need a car for a few years or you must have a lower payment, it might help you afford it.
Interest rate/credit score
The interest rate that you qualify for and receive will have a big impact on your payments and loan affordability. If your credit is poor, you will not have access to prime interest rates and will end up paying more out of pocket for that dream vehicle.
A down payment can reduce your monthly payment, and many lenders require one to buy a car. You don’t always have to make a down payment, but if you’re struggling to fit it into your budget, it can help to reduce the monthly payment amount.
Length of the loan
The longer the repayment period of your loan, the lower your monthly payment will be, but the more you will pay out in interest over time. A loan with longer repayment terms can help you afford a much more expensive vehicle, although you will be paying for it much longer.
Other important factors to consider
Before you get excited and look for a car with a $375/month price tag, consider these things: Are you planning on purchasing another large item within the next few years? If so, you may not be able to afford it if your pay doesn’t increase substantially. Are you saving enough? If you don’t have an emergency fund or need to save for a down payment on a house or another large purchase, you may want to allocate more to savings. Keeping your monthly payments lower will help you do that. Depending on how much of a down payment you make and which terms you pick, you may be paying this amount for a long time. Will you be comfortable with that?
Ways to reduce your payment
- Save before you buy. You can save enough to buy the whole thing or simply save enough for a nice healthy down payment that will lighten your monthly debt burden.
- Consider a lesser-expensive vehicle. Think about the most important features of your next vehicle. If you make some compromises, you might find a car that fits your needs without breaking the bank.
- Sell your car privately instead of trading it in at the dealership. This can take some work, but you can often get a better price by privately selling it than the dealership may offer you.
- Refinance your existing car loan. If you’re able to refinance at an interest rate that’s lower than your current one, that can help you save money. Refinancing with a longer loan term also may lower your monthly payment, but you’ll probably pay more interest in the long run.
While you may not be able to control the rising purchase price of cars overall, you can make choices that affect the size of your car payment. As you develop your car budget, remember to factor in the other costs that come with vehicle ownership — like fuel, auto insurance and ongoing maintenance — as you consider how much you can afford to finance.
Your next dream car awaits at Charlie Clark Nissan in El Paso, TX
At Charlie Clark Nissan in El Paso, TX, we make the car buying process as easy as possible with various online tools such as our monthly payment calculator, a shop by payment tool, and quick pre-qualification for personal financing. Call us at (915) 621-1707 or stop by to speak to an expert about the many finance options available for you at Charlie Clark Nissan. Let us put you behind the wheel of your next dream car today!