Four Steps To Help You Nail Down a Monthly Payment You Can Afford
Step #1: Figure out your monthly income
If you’re married, be sure to include your spouse’s income as well. Don’t forget things like alimony, child support, pensions, etc.
For the purposes of this question, we’re assuming that you live and work in the same city; that you have no outstanding debts and that you pay the same amount each month.
Step #2: Subtract your expenses
Step #3: Estimate costs for gas and insurance
Taking into account the gas mileage of your car, figure out how much you’ll spend on gas. You can usually find this information by research or by looking at the gas receipts from the past week (the website fueleconomy.gov can also help you plot your fuel expenses over the past year). It’s also a smart idea to look at the gas mileage of new models before you buy a car, since your car will lose value as soon as you drive it off the lot.
Next, deduct the gas expenses you’ve calculated for the month. If you drive and commute more than 18,000 miles a year, then calculate your insurance cost using the following formula:
Year = Square Root of ((Engine size/100)^2 + 200)
Multiply the engine size of your car by your insurance estimate per mile and then multiply it by your yearly mileage. You may need to do these calculations for three or four different cars to get an idea of how much car you can really afford.
Step #4: Use a car payment calculator
There are many resources available that can help you understand how much you can afford to pay for a car loan, but one of the best is the car loan payment calculator on Bankrate ’s website.
This website is often referenced as the go to resource for car loan calculators. When you go to their website, you can choose your desired car, and the calculator will optimize your repayment rate and other financial variables to show you how much you can afford in terms of a monthly payment.
To use this calculator, simply fill in a few pieces of information:
- The price of the vehicle you want to buy
- The maximum price you’re willing to pay (your budget)
- The length of your loan
- The total of any cash you have available (helpful if you want to negotiate the price)
- Your target interest rate
To make the information as accurate as possible, be sure to fill in the information for a specific vehicle and a specific loan amount. This ensures that the calculator will tweak the other financial variables to fit your specific situation.
5 Important Tips When Buying a New or Used Car
Knowing you can afford a new car is one thing. Getting a great deal on it is another. Follow these steps to make sure you get the best deal possible.
#1: Don’t forget about added costs
New cars may be bought with a clear understanding of the price tag, but they’re often purchased without taking into account the costs of various costs that come along with that of a purchase.
Here are some things that you should take into consideration when you’re planning to buy a new car:
Your current car insurance needs.
Your insurance premiums will most likely increase as you’ll need to upgrade your car insurance to one that’s insured for the value of your new car.
The cost of maintenance and repairs.
While newer models are designed to be more reliable and less prone to breakdowns, they can cost a lot more to maintain and repair.
The cost of state registration and taxes.
Most states charge registration fees that equal the car’s purchase price, thereby forcing you to pay your state fees right away.
If you’re driving an older vehicle, adding 200 miles to your monthly driving distance may not be an issue. However, most people are not so lucky and will have to adjust to higher gas expenses.
Just like with an older car, new cars require regular maintenance services such as oil changes and tire rotations.
#2: Leave plenty of wiggle room in your monthly budget
While you should be able to cover the cost of the loan with your monthly payments, keep in mind that your other expenses may increase over the years.
For example, if you leave work to care for your kids full time, your costs will go up: You’ll need to pay for child care and transportation which will reduce the amount of income you can devote to other expenses.
When buying a car, your monthly budget is going to include the loan payment but it should also include your regular living expenses.
#3: Shop around for the one expense you can control – auto insurance
Reworded, that reads, –Don’t just get the cheapest automobile insurance you can find. If the rates offered by one insurance company are considerably different from those of others, call and ask why.Ē
You can find free online auto insurance quotes from anywhere. But you should expect to pay a higher rate than that offered by a reputable auto insurance company. They deserve it for having ranked number one in policyholder satisfaction and financial security.
By shopping for auto insurance and rates, you can significantly reduce the cost of your cover.
#4: Buy used instead of new
The price of a new car is up 0.7% from last year and up 49.3% from 2004. The price of a used car is up 0.5% from last year and up 46.6% from 2004. In short, used cars are consistently priced much lower.