How Much Should You Spend on a Car?
How Much Should You Spend on a Car?
The amount you want to spend on a car is a personal choice that very much depends on the individual, how much the ownership of a particular vehicle is worth to you, and how much enjoyment and practical use you’ll get from it. If cars are your passion, it might be worth spending more. If you’re someone that is looking for a car to safely and efficiently get from point A to point B, it’s worth minimizing the cost as much as possible.
Although this is a personal choice, there are certain rules you can follow to ensure that you can afford your car payments, and to minimize unnecessary costs.
Read on to find out what to consider if you’re having trouble deciding how much to spend on a new car.
Can You Buy Used?
Are you looking to buy a new car, straight from the dealership, or a used vehicle? Even if a car has only been on the road for one or two years, it’s likely to be much less expensive, therefore quicker to pay off if you choose to finance it. You’ll be spending less on interest and getting a car that is still likely to be reliable and have modern safety features.
This doesn’t directly answer the question how much should you spend on your car – but opens you to the idea that you could take a step down in terms of price range by making this decision from the start.
Can You Buy in Cash?
Following on from the point above, if you choose to buy an older vehicle you’re more likely to be able to save up and pay for it outright rather than spending a vast amount of your hard-earned savings on interest rates through auto loans. If you choose a vehicle from 2003, you should pay under 5k for most choices. On the other hand, the car will be an older vehicle and potentially less reliable.
Rules for Financing
Many people choose to finance their vehicles as paying the total cost outright is not affordable. This option allows you to drive a newer, safer, more reliable vehicle with set payments per month. The downside is that you’ll pay interest – particularly if you go for a longer term loan. Here are some top tips to keep financing affordable:
- Save For a 20% Down Payment
A strong down payment is hugely important in minimizing the length of your loan and consequently the amount of interest you’ll pay. Save up for as large a down payment as possible. Consider 20% your minimum, but the more you can put down, the better in the long run.
- Ensure Your Payments Are Manageable With Your Income
There are several calculations you can do and rules you can follow to ensure your payments are manageable. The goal is to make sure that your total monthly car payments, including insurance, do not amount to more than 10% of your gross income:
- Calculate your monthly gross income.
- Find 10% of this figure and deduct the cost of insurance. The answer to this sum is the amount you can afford to spend on car payments per month.
- Find out what the interest rate will be for the vehicle you have in mind.
- Using the insurance rate mentioned above, use an auto loan calculator to figure out the total purchase price you can afford.
- Keep Your Loan to 4 Years or Less
The longer your loan the more you’ll pay in interest. If you can’t afford to take out a loan that will be through in 4 years or less, this is a sign you can’t afford the vehicle. If you can afford to choose a two year loan, the difference in interest will be well worth it.
- Watch for Deals
Some dealerships offer interest deals, for example 0% interest for 6 months. These deals can be particularly appealing, but you have to make sure you can afford the payments once the 6 months are up, and that the interest rate you will move over to is reasonable.