How much can you afford?

How Much Can You Afford to Spend On A Car?

One of the difficult decisions, especially for first-time car buyers, is determining what you can afford. Although you've found a car you really love, you'd rather not compromise your financial health to buy it. Car dealers encourage you to buy as much car as your budget allows, but that's not the best advice. Automobiles depreciate as you use 'em up -- their value drops.

It would be wise if you could consider how to finance the car at the beginning of the shopping process. This will avoid unpleasant surprises later and help you make a smart decision that fits your budget

You will be able to know the maximum price you can afford based on your monthly budget and the loan terms you select. Be realistic about what you can afford, taking into consideration...

• How much you have to put down (Downpayment). The amount of the down payment usually depends on the car and the type of financing chosen. Some lenders may ask for a down payment of up to 20% or more; others may require no down payment at all. The larger your down payment, the smaller your monthly payment will be and the less you will pay in total for the car in the long run.
  
• How much you can afford per month (Monthly Payment). You should estimate current monthly expenses, including housing costs, groceries, clothing, entertainment, health insurance and other installment obligations. Based upon your monthly income, make a rough estimate of what your monthly car budget should be. A good rule of thumb is that your monthly payment for a car should be no more than 15% of your monthly net income.
  
• How much you can spend on a car per month (Operating Expenses). The cost of driving varies depending on the car, how much you drive and your driving style. You should consider the cost of gas, oil, service, insurance and tires. Operating expenses can be as much as one third to one half of the monthly cost of a new car.