Car dealerships are notorious for making the car buying process overly difficult. Try figuring out how much a car actually costs and you’ll see exactly what I mean.
First, there’s the sticker price a car dealership advertises.
From there, you can find the manufacturer’s suggested retail price (MSRP) to compare to.
If you negotiate well, you may even work your way down to the dealer’s bottom line.
Unfortunately, the path from the sticker price to bottom dollar pricing is often shrouded in mystery. And if you’re not careful, you can wind up paying more than a car is truly worth – or paying more than you can afford.
But, pricing isn’t the only way car dealerships can screw up your finances. Not only do they make negotiating price a weird and stressful experience, but they’re awesome at convincing you their new cars are worth outrageous sums of money.
Keep in mind that, as of the first quarter of the year, the average new car loan came in at well over $30,000. And the average new car payment was $499 per month – for 68 months!
When you consider the fact that the median household income was only $59,039 in 2017, those numbers are absurd.
If you already have an idea of what you’re in the market for, check out our Car Affordability Calculator to see what your payment and price range should be.
BONUS: we’ll even tell you how this impacts your retirement!
Four Steps To Help You Nail Down a Monthly Payment You Can Afford
Like it or not, it’s up to you to figure out how much you can truly afford to spend on a car. No matter what, don’t leave it up to your sales guy to decide how much you can borrow.
Why? Because, according to their facts and figures, your credit and income may qualify you to buy just about anything on the lot.
True “affordability” is never dictated by lenders or big banks. At the end of the day, only you know how much you can afford to spend on transportation and your other bills.
So, how do you determine how much you can afford?
Step #1: Figure out your monthly income
If you’re not using a budget already, you may not know exactly how much you earn each month. Before you can decide on a car payment, this step is crucial.
Take out your pay stubs and add up your regular income in an average month. If you get paid the same amount every few weeks, this part is easy. If your income fluctuates, on the other hand, you may have to estimate your average income based on several months pay.
Step #2: Subtract your expenses
Once you have a handle on your income, you have to add up all your monthly expenses, too. How do you normally spend your money? Make sure to add up all your fixed expenses (rent, insurance, television, phone, internet, etc.) and estimate your fluctuating expenses (utility bills, gas, food, etc.).
Lastly, you should also plan some savings in your monthly budget. If you’re not saving cash every month, you should be, right?
Once you’re done tallying your monthly expenses and savings goals, compare your income to your expenses. How much money do you have left over every month?
Step #3: Estimate costs for gas and insurance
Will the price of insurance and gas go up or down when you buy a newer car? If you anticipate changes, make sure to add them to the simple budget you created in steps 1 and 2.
Here’s a good example:
Let’s say you earn $1,000 every payday for a monthly take-home pay of $4,000.
Here’s how your expenses look once you add them up:
- Rent: $1,200
- Food: $600
- Cable & Internet: $80
- Gas: $100
- Car Insurance: $80
- Utility Bills: $250
- Health Insurance: $200
- Childcare: $600
- Savings: $400
- Total: $3,510
In this scenario, you should have around $490 left over to spend on a car each month. That’s how much you could spend, but not necessarily how much you should spend.
Step #4: Use a car payment calculator
Once you have an idea of how your monthly income and expenses look, you can gain more insight by experimenting with a loan calculator, like the one below.
Enter the price range you plan to shop in along with the interest rate you hope to qualify for. From there, you can see what type of monthly payment you might end up with.
Reset Calculate
- Affordability $ to $
- Payment $ to $
Warning: Your car loan term is longer than years to retirement or invalid data was entered. Retirement charts are hidden.
#4: Buy used instead of new
New cars depreciate up to 9 percent the moment you drive them off the lot according to Edmunds, and they continue depreciating rapidly until they’re worth almost nothing. While the same can be said for used cars, you can at least avoid the initial drop that comes in the first few years.
Keep in mind that car payments are determined using more than the purchase price of a new or used vehicle. On top of principal payments toward your loan, you’ll also pay interest.
While new cars tend to come with higher prices and lower interest rates, older cars come with lower prices (on average) and higher rates.
#5: Stick to your budget
This final tip may seem obvious, but it’s incredibly important. If you’ve gone through the trouble to set a limit on how much you can spend on a car, make sure you stick to it!
A savvy car salesman will do anything to get you to buy a newer model or spend more money. Why? Because their income depends on it!
By setting limits ahead of time, you can ensure you’re the one in control.
Related: The One Monthly Payment KILLING Your Wealth
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Source: goodfinancialcents.com