How Much Car Can You Afford?
So you've made the Big Decision. No more dreaming or just thinking about it -- you're ready to go shopping. The process of buying a car can make your head swim with all the brands, models and options that are out there. And let's not forget the salespeople who can sometimes neglect your best interests when they're pushing a contract under your nose. Take heart though, your Perfect Car does exist. It just takes a little effort to find it. And the search begins before you even set foot on the lot.
When pondering this all-important question, you'll want to consider how much of a down payment you've got for your new car, and your monthly income. A standard guideline is that your monthly car payment should not exceed 20% of your monthly net income. Once you've determined this number, the other costs associated with your car fit neatly into two categories: fixed and variable.
Even just sitting there looking great in your driveway, your new car comes with fixed expenses. These are expenses you have no matter how much or little you drive your new car. They would include the down payment (for the first month), loan payment, insurance, tax and license fees.
The down payment, in the form of cash or trade-in, lowers the purchase price of the vehicle and the amount you'll need to finance. If you're financing a lower amount you'll gain some flexibility to choose lower payments over a longer loan period, or a shorter loan period that'll save you months of interest payments and very likely get you a lower loan rate.
Your loan payment will be the same each month unless you choose to prepay on your loan. Prepayment is not an option for many people, but there are benefits to adding a few extra dollars to your payment each month. You'll reduce the amount of interest you'll ultimately pay on the loan. Your credit report will reflect your good payment history. And, of course, you'll own your car sooner!
Insurance costs will vary greatly depending on where you live, the car you're insuring, your driving record and the other drivers in your household. Remember, all insurance companies are not created equal. You may be surprised to find massive price variation between three different quotes for the exact same coverage, so it's wise to shop around. Insurance rating services such as A.M. Best can give you an idea if an insurance company is a good choice to consider.
Tax and license round out the fixed costs associated with your new car. The sales tax is a one-time charge that varies from state to state based on the stated value of your car when you purchase it. License charges also fluctuate between states. Some charge a flat rate for all car licenses while others charge on a scale depending on the value of your car and it's age. A quick call to your local license bureau can tell you what you'll pay to license and register your new car.
Variable expenses are just that -- variable and dependant on how much you drive, maintenance you perform, and any improvements you make on your new car. First there's the day to day expenses associated with owning a car like gas, oil, oil filters, and those occasional trips through the car wash.
Maintaining your car can cost almost nothing if you have a brand new car, or somewhat more if you choose a preowned model. No car is immune from these expenses -- you can expect to replace your tires, belts, shock absorbers, and refurbish various mechanical parts as your car ages and the miles add up.
Finally, there's the improvements you choose to make to your car. The possibilities are endless: custom wheels, high end stereos, security and navigation systems, performance enhancements. All these make your car unique and more fun to look at and drive. They also add to the cost of your car and should be considered when you're coming up with a new car budget.