How Much Car Can I Afford?

There are several factors you should consider before purchasing a car. There is more involved than just the price of the car. A well-researched plan and budget will ensure that the car you buy continues to be affordable months into the future.

Who Are You?

It is important to define your financial status before you set your plan and budget. You will probably fit into one of three classifications: a first-time buyer with no car insurance or car loan experience; a driver with some traffic ticket and credit problems; or a driver with existing car insurance and a good credit rating. Each class of buyer has some different challenges, but the steps to a good car-buying decision are the same.

Setting a Budget

There is more to owning a car than just the monthly car payment. You need to factor in insurance, fuel, maintenance and repair costs. For the person with the spotty driving record, the monthly insurance bill may be a higher payment than the car loan. Write down the amount of money you can afford to spend each month on your total auto expenses. Get an estimate on the cost of insurance for the type of car you want to buy, estimate how much you will spend in gas each month, factor in at least $50 per month for maintenance and subtract these numbers from the amount you wrote down for the budget. The amount left is for the payment on a car loan.

Purchase Considerations

New cars can be financed for a longer term, usually with better rates, and have a factory warranty. Used cars are cheaper. Call your bank and get its new- and used-car interest rates. Find a payment calculator on the Internet by searching "auto loan calculator." Using the loan payment number from your budget math, calculate how much car loan you can afford. Be conservative with your calculations. First-time buyers may need a loan co-signer to get their loan. Do not forget to add taxes and registration into the cost of the car. Used-car buyers may want to seriously consider purchasing a maintenance warranty with the car to avoid any budget-busting expenses.

Example

You have decided you can afford to spend $400 per month. You have found insurance for $75 per month on a nice used car and plan to spend another $100 on gas and maintenance. This leaves $225 for a monthly car loan payment. You have $1,000 saved up that should cover taxes, registration and some down payment. The auto loan calculator shows a $9,000 loan at 8 percent for 48 months means a payment of $220. You want to look for a late-model used car for about $8,000. The extra $1,000 will cover an extended warranty.