Buying a car can be an exciting time in everyone’s lives as it’s technically the second largest purchase that anyone will make short of buying a house. Picking out the right car is more than just about finding the right make, model, and even color, but it’s also important to keep your budget in mind. Of course, longer-term financing and leasing can make monthly payments really low and enticing, but it’s important to always remember what you can and cannot actually afford. But how do you calculate how much car you can afford?
Settle on your desired monthly payment
While it’s easy to look at a $20,000 or even a $30,000 car and think to yourself, “I can totally afford that,” you might want to consult one of the numerous online calculators first and really see. One advantage of using a “car affordability” calculator, like this one on Nerdwallet.com, is that you can reverse engineer your monthly payment.
For example, you can enter your desired monthly payment, choose if you’re buying a new or used car, select your credit score range, and then your desired loan term (36, 48, or 60 months). In a matter of seconds, the Nerd Wallet calculator will tell you the maximum amount of cars that you can afford along with the average interest rate. Either way, the first step to figuring out how much of a car you can afford is to know how much of a monthly payment you can comfortably afford each month.
Figure out car loan amount
Keep in mind that these calculators are only giving estimates and that the actual interest rate that you qualify for can differ. Speaking of interest rates, the reason that the calculator asks if you’re buying a new or used car is that the interest rates can differ depending on which you choose. Used cars typically have higher interest rates from any lender because they are considered to have a higher risk of breaking down due to their age.
When you enter your monthly payment, loan term, and credit status information, you will be presented with a car loan amount that you should aim for, minus the down payment amount.
Decide on a comfortable down payment
When financing a car, the simple math of it all basically states that more you put as a down payment, the lower your monthly payment will be. Of course, because it’s basic math. And if you can only put $500 to $2,000 down on a car, then that’s fine. But the tough part is fighting the urge to put more down if you can afford to.
Just keep in mind that for every $1,000 you put down on a car, it will drop the monthly payment by roughly $20. So be sure to figure out how much you can comfortably put as a down payment on a car without having to break your whole piggy bank. Paying $20 less per month might not be worth it if you have to sacrifice another $1,000 upfront.
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Remember to be reasonable
Car buying is an emotional affair, no matter how stoic you want to make yourself out to be in front of a salesperson. But try as you might to keep a straight face at the dealership, just know that the BMW that you’ve always wanted, or that shiny used Mercedes-Benz in the corner of the lot, might actually be out of your price range. Be reasonable with how much you can actually afford and chances are that you’ll be happier later on when you’re not struggling to make car payments on that fancy used luxury car that seemed like a good idea at the time.