A Quick Guide to How Much Car You Can Really Afford

This Article was Updated July 5, 2018

When you are looking to buy a vehicle, the first thing you should do is apply for a preapproved loan. The loan process can seem daunting, but it’s easier than you think and getting preapproval prior to going to the car dealer may help alleviate a lot of frustration along the way.

Here are five steps for getting a car loan.

  1. Check Your Credit
  2. Know Your Budget
  3. Determine How Much You Can Afford
  4. Get Preapproved
  5. Go Shopping

1. Check Your Credit

Before you shop for a loan, check your credit report. The better your credit, the cheaper it is to borrow money and secure auto financing. With a higher credit score and a better credit history, you may be entitled to lower loan interest rates, and you may also qualify for lower auto insurance premiums.

Review your credit report to look for unusual activity. Dispute errors such as incorrect balances or late payments on your credit report. If you have a lower credit score and would like to give it a bit of a boost before car shopping, pay off credit card balances or smaller loans.

If your credit score is low, don’t fret. A lower score won’t prevent you from getting a loan. But depending on your score, you may end up paying a higher interest rate. If you have a low credit score and want to shoot for lower interest rates, take some time to improve your credit score before you apply for loans or attempt to secure any other auto financing.

2. Know Your Budget

Having a budget and knowing how much of a car payment you can afford is essential. You want to be sure your car payment fits in line with your other financial goals. Yes, you may be able to cover $400 a month, but that amount may take away from your monthly savings goal.

If you don’t already have a budget, start with your monthly income after taxes and subtract your usual monthly expenses and how much you plan to put in savings each month. For bills that don’t come every month, such as Amazon Prime or Xbox Live, take the yearly charge and divide it by 12. Then add the result to your monthly budget. If you’re worried, you spend too much each month, find simple ways to whittle your budget down.

You’ll also want to plan ahead for new car costs, such as vehicle registration and auto insurance, and regular car maintenance, such as oil changes and basic repairs. By knowing your budget and what to expect, you can easily see how much room you have for a car payment.

3. Determine How Much You Can Afford

Once you understand where you are financially, you can decide on a reasonable monthly car payment. For many, a good rule of thumb is to not spend more than 10% of your take-home income on a vehicle. In other words, if you make $60,000 after taxes a year, you shouldn’t spend more than $500 per month on car payments. But depending on your budget, you may be better off with a lower payment.

With a payment in mind, you can use an auto loan calculator to figure out the largest loan you can afford. Simply enter in the monthly payment you’d like, the interest rate, and the loan period. And remember that making a larger down payment can reduce your monthly payment. You can also use an auto loan calculator to break down a total loan amount into monthly payments.

You’ll also want to think about how long you’d like to pay off your loan. Car loan terms are normally three, four, five, or six years long. With a longer loan period, you’ll have lower monthly payments. But beware—a lengthy car loan term can have a negative effect on your finances. First, you’ll spend more on the total price of the vehicle by paying more interest. Second, you may be upside down on the loan for a larger chunk of time, meaning you owe more than the car is actually worth.

4. Get Preapproved

Before you ever set foot on a car lot, you’ll want to be preapproved for a car loan. Research potential loans and then compare the terms, lengths of time, and interest rates to find the best deal. A great place to shop for a car loan is at your local bank or credit union. But don’t stop there—look online too. The loan with the best terms, interest rate, and loan amount will be the one you want to get preapproved for. Just know that preapproved loans only last for a certain amount of time, so it’s best to get preapproved when you’re nearly ready to shop for a car.

However, when you apply, the lender will run a credit check—which will lower your credit score slightly—so you’ll want to keep all your loan applications within a 14-day period. That way, the many credit checks will only show as one inquiry instead of multiple ones.

Get matched with a personal loan that’s right for you today.

Learn more

When you’re preapproved, the lender decides if you’re eligible and how much you’re eligible for. They’ll also tell you what interest rate you qualify for, so you’ll know what you have to work with before you even walk into a dealership. But keep in mind that preapproved loans aren’t the same as final auto loans. Depending on the car you buy, your final loan could be less than what you were preapproved for.

In most cases, if you secure a pre-approved loan, you shouldn’t have any problems getting a final loan. But being preapproved doesn’t mean you’ll automatically receive a loan when the time comes. Factors such as the info you provided or whether or not the lender agrees on the value of the car can affect the final loan approval. It’s never a deal until it’s a done deal.

If you can’t get preapproved, don’t abandon all hope. You could also try making a larger down payment to reduce the amount you are borrowing, or you could ask someone to cosign on the loan. If you ask someone to cosign, take it seriously. By doing so, you are asking them to put their credit on the line for you and repay the loan if you can’t.

When co-signing a car loan, they do not acquire any rights to the vehicle. They are simply stating that they have agreed to become obligated to repay the total amount of the loan if you were to default or found that you were unable to pay.

Co-signing a car loan is more like an additional form of insurance (or reassurance) for the lender that the debt will be paid no matter what.

Usually, a person with bad credit or less-than-perfect credit may require the assistance of a co-signer for their auto financing and loan.

5. Go Shopping

Now you’re ready to look for a new ride. Put in a little time for research and find cars that are known to be reliable and fit into your budget. You’ll also want to consider size, color, gas mileage, and extra features. Use resources like Consumer Reports to read reviews and get an idea of which cars may be best for you.

Once you have narrowed down the car you are interested in, investigate how much it’s worth, so you aren’t accidentally duped. Sites such as Kelley Blue Book or Edmunds can help you figure out the going rate for your ideal car. After you’re armed with this information, compare prices at different car dealerships in your area. And don’t forget to check dealer incentives and rebates to get the best possible price.

By following these steps, you’ll be ready to make the best financial decision when getting a car loan. Even if you aren’t ready to buy a car right now, it doesn’t hurt to be prepared. Start by acquiring a free copy of your credit summary.

It is always a good idea to pull your credit reports each year, so you can make sure they are as accurate as they should be. If you find any mistakes, be sure to dispute them with the proper credit bureau. Remember, each credit report may differ, so it is best to acquire all three.
If you want to know what your credit is before purchasing a car, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get a free credit score updated every 14 days.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

Image: istock

Source: credit.com

What I Wish I Knew About Credit Cards & Debt Going Into College

There can be a small gratifying feeling of swiping your credit card to pay for something without really thinking about how it will affect your finances until way later. Especially when you first get a credit card and you’re thrown into a new setting like college. There might be a lot that you don’t know or fully understand when it comes to having a credit card. We asked our own Intuit employees to share some of their early experiences with credit cards and what they wish they knew beforehand.

Building Credit Starts with Having a Credit Card 

Going into college I had a very debt-averse background thanks to my parents. What I didn’t know is that when you don’t have a credit history, you’ll need a cosigner for things like car loans and apartments. Though that wasn’t an issue for me, it turns out if I’d gotten a credit card and developed a payment history, even in a small amount, that would have helped me when I moved out of the dorms. It takes a lot of discipline to have one for the purpose of building credit without extending itself. If you can treat a credit card like a debit card, I’ve always felt that’s the way to go. Michael S.

Plan How You’re Going to Manage Student Loan Debt

I wish I knew more about student loan interest and how it is calculated even though the loan is deferred while you are in school. After paying off my Bachelor’s, I made sure when getting my Master’s to make monthly payments, even though it was not required. I also think it’s helpful to know how to consolidate and refinance student loan debt to save money. I used SoFi and was able to reduce my interest rates, thus helping me pay off the debt faster. – René W. 

Do Some Research on What it Really Means to Have a Credit Card 

If I could go back, I would have not acquired a credit card the minute I turned 18. I wish I would have been more knowledgeable about the fine print that comes with having a credit card, instead of just the buy now and pay later glorification. I wish I would have known what a credit score was, what an APR really entailed, what the hidden fees were and the vicious cycle that a credit card can be if you are not careful. This debt information would have saved me years of headache, extra fees and the lengthy payment plan I was on to clear my debt. – Heather F.

Make the Most of Credit Card Promotions

There are so many credit cards out there. I wish I knew about the various promotions for signing up for a credit card and the ones with great cashback on things that I spend the most on. Found out about them eventually but I wish I knew earlier on. For instance, Chase Sapphire Reserve which had a promotion going on  – 60,000 points (which translated to $600 or $750 if I redeemed it for travel) if I spent $4000 in the first 3 months. As an avid traveler, $750 is a big deal! – Nikita B.

Remember Credit Cards are Not Free Money

I wish I had a better understanding of the obvious: credit cards are not free money. My first credit card was a store card. It was my first month of college and I went with my new friends to the mall where I found a few new outfits I wanted to buy. Of course, I only had enough for part of the purchase, and so I was figuring out which pieces I liked most and which ones I’d leave behind. The store clerk told me not to worry, I could sign up for the store card and walk out of there today with ALL of the clothes. Delightful! 

Months went by and I forgot about it. It wasn’t until I started getting creditor calls that I realized I made a huge mistake. It didn’t take long to pay off the card, but it took years to fix my credit. – Jane L

Make Sure You Know What You’re Signing Up For

There was a credit card tent right outside the main thoroughfare heading into campus. (Smart strategy to not be on campus and deal with campus regulations.) They had a crowd going because they somehow figured out how to give away an appropriately themed UCSB t-shirt for anyone that signed up for the FREE college credit card. This t-shirt was so all the rage, and cool in a way that would not make the Dean proud if you know what I mean. I signed up because they swore it was free, but mostly because I wanted the t-shirt. I was so new to the school that I didn’t even know my new campus address, so I put down my home address. By the time my father called me – two weeks later – to reprimand me, I had completely forgotten about the card. My dad gave me the card back a year later after we had a strict talk about how to use and not to use it. – Clint P.

Personal finance can be tricky, and this is specifically true for credit cards. We hope these #RealMoneyTalk stories will help you learn from past mistakes so you don’t fall into debt or hurt your credit score. Keep researching and arming with yourself with the knowledge to keep your finances in check!

Posts provided by Intuit employees

Learn more about security

Mint Google Play Mint iOS App Store

Source: mint.intuit.com