Unsurprisingly, buying a car is a major financial commitment. That leads many potential car buyers to head to a dealership intent on negotiating the best deal—or at least on not paying for things like undercoating (whatever that is).
However, before you start haggling, you need to answer a much bigger question: Can I afford a car? Addressing this isn’t as fun as taking a test drive, but it’s an equally important part of buying a car. After all, you may not feel so free driving off the lot if you’re shackled to debt, trying pay for that vehicle.
Currently, U.S. consumers owe more than $1 trillion in debt on cars, an amount linked to the highest loan amounts and monthly payments ever. Risky financing can make it easy to spend too much on a car, which many borrowers do. Loan delinquency rates are rising as well. To help avoid a similar outcome, consider the following when determining how much to spend on a car.
What’s Your Motivation?
Before you look at any numbers, think about why you want the car you want. Emotions play a key part in any major purchase. Don’t ignore yours. Figure out what your motivation is for that new car—and whether it aligns with your car-buying budget.
What does having a car mean to you? Is it a necessity? A luxury? Somewhere in between? Do you need a dependable car for your commute? Are you upgrading to a larger vehicle to support a growing family? Or maybe you came into some money and simply want to show off a little?
Okay, that last one doesn’t sound very practical, because well, it isn’t. But that doesn’t mean it’s not valid! Going into any major purchase with your eyes open can help you determine whether it’s smart for you. Think about how spending more on a car relates to other purchases you may want or need to make, right now and in the future. If you can truly afford it, don’t be afraid to treat yourself.
How Much Should You Spend?
Of course, truly figuring out what you can afford is tricky. You should consider taking one of a couple different proven approaches when it comes to determining how to budget for your car.
First, some shoppers will prefer to build their budget around industry standards. General best-practice advice tends to vary about how much your car payments should be, but most pin this amount at somewhere between 10 and 20% of your monthly take-home pay.
Now, there’s a different way to answer this question as well. Instead of using an industry standard to prescribe a set percentage of your budget, you can look at your existing spending to determine how much you can afford. It could end up being more or less than that 10 to 20%, and that’s fine, depending on your other expenses.
Keep in mind, this option tends to work only for those who already have a strong grasp on their spending behavior. If that describes you, you may be better able to create a harmonious budget that accommodates your needs and wants. For instance, if you want a nicer car, accept that you may need to cut costs elsewhere to afford it (unless you plan to live in that car, too). Budgeting is, after all, a balancing act.
Understand the Costs
Once you determine how you’re going to account for your car cost in your budget, you’ll want to make sure the amount you’re using is accurate. The “sticker price” of your new car won’t be the only thing you’ll pay for right now—or later.
A car is not a one-time expense. You’ll need an ongoing line in your budget to account for maintenance, gas, insurance, and other costs. Think about all of these items before you determine your purchase price; this might require you to shop for a less-expensive model than you initially thought you could afford. After all, what good is a new car if you can’t afford to put gas in it?
Now that you have a number in mind, the next thing to address is how you plan to reach it. Do you have a car you’ll trade in? Calculate its Instant Market Value to ensure you get as much money for it as possible.
If your trade-in won’t cover the entire cost, determine how quickly you need the vehicle. Ideally, you’ll be able to plan ahead for your purchase. You could set up a dedicated bank account for it and siphon part of each paycheck toward your goal until you reach it. In the real world, that’s not always possible. Your car may be dead, and you need a replacement—now.
If that’s the case, you may have no choice but to finance your vehicle. If you choose this route, be sure you know what you’re getting into. As with any consumer loan, shop around to ensure you’re getting the best deal possible. Make sure you're comfortable with the interest rate of the loan, and determine how much you’ll end up repaying overall for the car. And if you need a co-signer, make sure he or she understands what that means.
Take Preventative Measures
You may not be in the market for a car right now, but you’ll likely shop for one in the future. In that case, you can do a few things to set yourself up for success.
First, have an emergency fund. It’s best to keep 6 months of expenses in case the unexpected happens, like an illness, job loss, or your car breaking down. With an emergency fund, you can afford repairs or even a new vehicle without incurring a long-term impact on the rest of your life. Your fund should be a line item in your budget, separate from whatever you’re already saving for a car itself (if you go this route), and you should use it only for true emergencies.
Second, keep your credit score in good standing. If you choose to finance a vehicle in the future, your credit will play a big role. It will partially determine how high the interest rate will be on any car loan you receive—or whether you can receive a car loan at all.
Car buyers with bad credit aren’t out of luck. Some simple steps to maintain or improve your credit include paying your bills on time, decreasing your debt, and increasing your available income. Just remember that you can’t magically improve your credit the night before you head into a car dealership. Like a good reputation, good credit is earned over time.
CarGurus encourages all car shoppers to be conservative and careful budgeting for a car purchase. If you practice appropriate spending and budgeting habits, you’ll stand a better chance at having a successful car-buying and car-ownership experience, not to mention being able to get more for your car when it’s time to replace it.