How many cars can I afford? – Forbes Advisor

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So, you are about to make an important financial decision and buy a car. Besides knowing what kind of car you want, you need to first determine what you can comfortably afford.

While buying a car is faster and often easier than getting a mortgage, you still need to budget for expenses other than the selling price of the car itself, such as closing fees and taxes and insurance payments. We’ll show you how to get ready to buy the car that’s right for you at no extra cost.

3 steps to determine how much car you can afford

According to Move.org, the average cost of car ownership is over $ 5,264 per year, which is nearly $ 440 per month. However, this cost can vary by state (Michigan tops the charts, averaging over $ 9,300 per year or $ 775 per month). Therefore, you need to make sure that you can afford the car on a monthly basis, not just at the time of purchase. Here are some basic steps to help you check your budget ahead of time.

1. Calculate your monthly net income before debt

One of the very first steps you should take is to compare your monthly earnings after taxes (net income) with your monthly expenses. Determine your net monthly income after paying off existing debt, such as credit cards or mortgages, utility and insurance bills, and any health, childcare, and average living expenses. This should give you an accurate picture of your cash flow after meeting all of your obligations every month.

It’s more important to focus on the type of car you can afford, rather than the one you need. Because if you can’t buy a car right away and can’t pay the car loan, the lender can return your car to the property.

Financial planners recommend that your car loan should not exceed 15% of your monthly net income. Adding gas, insurance, and maintenance will also increase your costs by a few percentage points.

So, for example, if your monthly home payment is $ 3,000 per month, the 15% threshold would allow you to pay off a $ 450 car loan every month. By limiting your payment for the car to 15% of your monthly net income, you will most likely be able to save on sudden expenses, for example, if the car needs to be repaired.

2. Check your credit score.

How much you pay for a car loan in terms of the annual percentage rate (APR) is determined by your credit rating. The higher your score, the less interest you pay on the loan.

Your FICO credit score determined by these factors: your payment history; the amount owed; the length of the credit history; new loan and credit balance. IN FICO score is based on credit reports compiled from three major credit bureaus: Experian, Equifax, and TransUnion.

To understand where you fall in the FICO credit rating range of 300 to 850, check your account for free

3. Estimate your spare money for the down payment.

The down payment for the car is cash out of your pocket. While there are some car dealers and lenders that offer zero down payment financing, it is best to invest a little money to cover closing fees and taxes and / or reduce the loan amount. Depositing some cash will also shorten the overall duration of the loan.

For example, suppose your budget is $ 20,000 and you found a car at that sale price. If you borrowed $ 20,000 at 4% interest and paid for the car within 60 months, your monthly payment would be about $ 368. After 60 months, you will pay $ 22,100, including $ 2,100 in interest.

If you had a down payment of $ 3,000, your monthly payment would drop to about $ 313, and the total loan amount plus interest over the life of the loan would be only $ 18,785.

How to explore funding options

Start with your bank or credit union

Traditional lenders like a bank or credit union are a great place to apply for a car loan because they often have lower rates or special offers for clients who already do business with them. You can also get pre-approval from your bank or credit union before you start looking for a vehicle, which will give you a better idea of ​​what you can afford.

This is a competitive market among lenders, so try to get at least two or three quotes from different lenders. It also helps your bargaining power.

This is especially true if you are already a client of a bank or credit union and have a good track record of borrowing from that institution. They can quickly assess your financial history and credit profile as they are already in their system. If all goes well, they can give you a letter telling you how much money you are allowed to borrow, which you can use to buy a car or negotiate a better deal with other lenders.

Consider getting a loan through a dealership

Auto dealerships, especially if they are affiliated with manufacturers such as Ford, General Motors, Honda or Toyota, have access to retail lenders who provide loans to qualified borrowers at the dealer’s location. But apart from these eminent lenders, most dealerships also have access to national and regional car finance banks.

Most of the time, when you get a loan from a car dealership, you end up sending your monthly payments to a partner bank or finance company, rather than the car dealership where you bought the car. When you repay the loan, the financial institution will send you the title to the car.

Set a target price and shop

Once you’ve checked what exactly you can afford and received your loan pre-approval letter, you can now confidently use a range of vehicles within your target price range. Fortunately, most of the initial car purchases can be made online at home.

The Covid-19 pandemic and restrictions on businesses have forced many car dealerships to modernize and improve their websites by simply listing inventory and generating leads prior to the entire car selection process, securing funding, and completing the transaction.

This allows shoppers to buy new or used cars from local dealers online from the comfort of their home. There are also online aggregator websites such as cars.com, cargurus.com, carfax.com and others that help you search for and frequently make transactions. These searches also allow you to search by country, not just your neighborhood, and sometimes dealers will list shipping charges if you buy your car online.

Companies using apps like TrueCar, Carvana and Vroom have digitized the process, including multi-lender funding and features like a seven-day test drive.

Dealer purchase

Today’s car buyer is tech-savvy, as are dealerships. More and more car buyers turn to car dealerships with a specific vehicle in mind because they have already visited the dealer’s website and looked through the inventory to find a suitable vehicle.

In other words, consumers now have more choice and control, from budgeting to buying cars, to finding the right dream car that also fits their personal financial profile.

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