Determining Your Car Buying Budget

Buying a new car is fun, but preparing to buy a new car may not always be. The anticipation of purchasing a new vehicle will keep you up at night, eagerly awaiting the time you get in your soon-to-be ex vehicle and hit the dealer's lot. One of the things that may keep you from fully enjoying your car buying experience is a lack of security in the knowledge that you're going to be able to afford it. What follows is a brief guide about ensuring that you'll be able to afford the car you buy, and won't wake up in the middle of the night to the repo man dragging it down the street.

What to do Before You Shop

Getting a car loan is a normal thing. Many people don't believe in debt in any way. They think that you should always pay cash, and never finance anything. This is a wonderful idea, in theory. Sometimes, things happen, and you need a new car in a hurry. Determining how much car you can afford on your salary used to be an easy prospect. You just kept secreting money away until you had enough to pay the sticker price. Auto financing has only begun to run rampant in the last 30 years or so. Now it has become far more complex a process to figure out just how much car you can afford. I'm sorry, but you may have to forgo that Corvette or that BMW 5-series for a more economical choice. There are a few simple ways to figure out how much you can afford, and it all starts with how much you make.

It's important to know a few things before you leave to go car shopping. You have to know how much money you have as a down payment, the book value of the car you'll be trading in, assuming that you are, and how much cash you can comfortably afford to dole out each month. The first part is the easiest. Some people are savers. They can tell you how much is in their savings account, or their cookie jar, at any given moment. For those who aren't born penny-pinchers, saving money is a lot more difficult. However, if you'll just keep this one thing in mind, I think you'll do well. The more money you save before you go shopping, the nicer the car you can afford on your budget. If you can save just 1500 dollars, do it. It will make a major difference in your car payment.

How Much Can You Afford

After you know how much down payment you have, you can figure out your comfortable monthly payment. Notice, please, that I'm not talking about your maximum monthly payment. There's a difference. Being able to pay the same amount every month, without breaking a sweat or wondering where your next meal is coming from is important when making this determination. The easiest way to figure this out is to do a budget. Sit down with a pen and paper, and write down your monthly income. Be realistic; no pie in the sky dreams here, please. As a matter of fact, when you arrive at your number, subtract 10 percent from that. This will give you a realistic look at what you have to work with. Also, when talking about new cars, price quotes will allow you to estimate how much it will cost you. The sticker price of the car is only a starting point. Haggle if you want to live.

Once your income is on paper, begin subtracting your bills in order from most to least important. House payment or rent, electric, water, food, etc. Whatever you have left is what you should be able to afford. However, just because you have 500 dollars left at the end of the month, don't think you can go buy the Rockefeller-mobile. You should only put about half of this "disposable income" into a vehicle. This will allow you some leeway if something unexpected happens.

So, now you've come to your comfortable monthly payment. If you have a vehicle to trade, even better. You can lower your monthly payment even more! Please, don't ever buy a car on a 5 year loan. The interest on those loans will kill you, and you'll be left with a car of very little value when it finally becomes yours. You should never finance for a period of over 4 years, or 48 months. 36 months would be ideal, but 48 months is acceptable. This will give you the best mix of low monthly payment, and resale value at the end of your loan. So if you've decided that you can afford 300 dollars per month, and you'd like to pay for 48 months, you can now officially afford a $14,400.00 car, right?

Wrong. You forgot interest. Banks that lend money for cars will generally charge you, if your credit is good, about 5 percent. So subtract 5 percent from the amount you can afford, and you come up with $13,680. This is a more realistic figure. Stay around this area, and a 5 percent loan and you should be in good shape.

Where to Find More Information

There are many payment calculators online that will help you figure out how much car you can afford. Places like About.com will help you do the math, and may even offer suggestions as to the price you can expect to get from your trade. Kelley Blue Book will give you the current trade-in-value of your current car. Also, it will help you immensely if you do your own research into car loans. Buy going into a bank, or getting a loan approved on your own before you head to the dealership, you'll avoid getting into trouble, and you'll control your own financing destiny. Before shopping for new cars, price quotes will allow you to give the bank an estimate of how much money you'll need. It will also tell you immediately if it's out of your league.

The bottom line is this; if you cringe the first time the salesperson tells you the payment, run. Listen to that gut feeling. If you're looking at new cars, price quotes from the dealer will allow you to avoid sticker shock. If you have a particular type of car that interests you, call your local dealers ahead of time, and see if they can give you their price ranges. Oh, and the final piece of advice; dealers love to tack on things that make your monthly payment lower, but enslave you for a longer period of time. Don't let them do it. You don't need the super-diamond-hard-combination-bug-repellant-machine-gun-mount. After all, you just drive it from place to place; you don't fight battles in it.