A new car costs an average of $ 45,000. Buy one you can afford with these tips

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Read our tips and advice before taking these new car keys.

Thianchai sitthikongsak / Getty Images

You read that title correctly. From September, the a new car costs an average of $ 45,000. There are a lot of reasons why this happens, but if you’re not someone who can fund that amount, then don’t worry. You still want to buy a car within your budget, even if that means missing out on a more sophisticated vehicle or the latest technological features. Keeping a financially responsible car purchase is a much better feeling.

However, it takes more than looking at a car’s MSRP to understand if you can afford it. Most of us budget monthly, so we’ll walk you through how to see if a car payment is working for you. Read on for our tips and tricks to make sure you don’t overspend on a new or used car. That way, when you sign the papers, you can drive home with your new car knowing you’ve made the best decision possible.

Define a monthly number

It may sound obvious, but the first step in determining how much you can spend on your new car is to calculate your monthly budget. Add up all of your monthly income, subtract expenses (from rent or mortgage payments to food and health care), and see how much you have left. For your benefit, the Federal Trade Commission even offers a example of online budget sheet.

But don’t spend every penny of your disposable income on a car. Instead, experts have developed guidelines for how much is reasonable to spend.

In the old days, advisers would sometimes recommend what was called the 4/20/10 rule: make a 20% down payment, have a loan no longer than four years, and don’t let your payments exceed 10% of your gross income. But these numbers are unrealistic for buyers today. In part, that’s because auto loans last much longer: In March 2020, the average auto loan surpassed 70 months, according to Edmunds research.

Today, experts generally recommend spending no more than 15% of your monthly take-home pay (this is the amount you receive after taxes and other deductions). Depending on your budget, spending closer to 10% might be a more reasonable guideline.

Based on these rules, a person with a net income of $ 3,000 per month might consider a payment of $ 300 to $ 450 per month, figures that represent 10% and 15% of their take-home pay, respectively. If you’re not looking for a luxury SUV or pickup truck, that’s usually a good number when shopping for new, more affordable cars.

However, it is important to note that you are not only responsible for paying for the car. Also factor in insurance costs when calculating your total monthly car expenses. Don’t let the combined cost of insuring and paying for the car exceed your rule, whether it’s 15% or whatever. For this reason, choosing a base car payment closer to 10% to 15% of your net income is a safer rule to make sure you don’t blow your budget.

For this reason, many advisers recommend setting a limit on the total amount of your car spending per month instead. For example, you might decide not to spend more than 15% of your total take home pay on your loan repayment, insurance and gas costs combined. This can be an especially important rule for buyers who already have other debt.

Audi car dealership

Your monthly payment can vary widely depending on your credit rating, the length of your loan, and the amount of your down payment.

Audi

Calculation of the monthly payment

Once you know how much you can afford to spend, it’s time to figure out how much you would pay for the car you want. New car listings and review sites usually only list the total MSRP (Manufacturer’s Suggested Retail Price), so you’ll need to convert that to a monthly figure. Most car manufacturers offer a loan calculator on their consumer websites. Simply enter data such as your potential down payment and interest rate, and the site’s calculator will tell you approximately how much the loan would cost per month.

We also have a loan calculator available on the Roadshow website. Enter the amount you want to pay per month, along with details like your expected loan term, interest rate, and other details, and our calculator will help you determine how much car you can afford. to buy. You can also go the other way with our basic loan calculator, entering a car’s sale price and other data to calculate an approximate monthly payment number.

Keep in mind that interest rates will vary widely depending on your credit history, your down payment, and whether you are financing directly through a car manufacturer, or through your bank or bank. credit union. Rates generally remain low at this time, but obviously this can vary widely from person to person.

Roadshow car loan tool

You can use online calculators like this one from Roadshow to get an idea of ​​how much you can spend per month.

Jake Holmes / Roadshow

Other things to consider

There are more costs to owning a car than just payment and insurance. You should also plan for how much you will need to spend on gasoline and maintenance, although a new car should be covered by warranty for most of the loan period of a new car.

Also consider the length of your auto loan. While longer loans will usually give you a lower monthly payment, you will pay more interest overall. Plus, longer loans increase the length of time you’re “underwater” on the new car. This is the situation, more formally known as negative equity, when you owe more on your loan than the car is worth if it were sold. And that can make it more difficult to sell or trade in the car.

Finally, remember that these guidelines can and should vary depending on your situation. If you drive little or spend a lot of your income on housing costs, you may prefer to spend less per month on your new car. If you are a car enthusiast or need a very specific vehicle for your work or travel, you may want to stretch your budget a bit more. Overall, for most people, spending 10-15% of your take-home monthly pay on a new car loan is a good course of action.


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