Does a New Car Loan Fit in Your Budget?

Time for a new set of wheels? Whether your current ride has logged its last mile, or a longer commute means not having a car is no longer optional, buying a new or used vehicle can be equal parts exciting and overwhelming.

Although you may feel right at home behind the wheel of your dream car, the sticker on the window, coupled with the thought of a monthly car payment, can be enough to send your stress levels from zero to 60 in seconds. In fact, the heavy lifting starts before you even set foot in a dealership with an honest look at how much car you can really afford.

If that new car smell is calling your name, here’s how to know if an auto loan fits into your budget.

How Much Can You Expect to Pay for a Car?

Vehicles have always been big-ticket purchases, however car prices have reached an all-time high in 2018. To give you an idea of how much you can expect to pay for a new car, Kelley Blue Book reports price tags for 2017-2018 midsize cars average $25,000, while midsize SUVs come in at $33,000.

Although used cars have traditionally been a more affordable option, a surge in used car sales has also raised the average used car transaction price to nearly $20,000.

Before heading to the nearest car lot, you’ll need to do your research, comparing makes and models, as well as new versus used options, to find average prices that work with your finances. Doing your homework not only means you’ll have a better idea of what’s out there as far as new and used cars, but can also help you make a more informed purchasing decision and know if you’re getting the best deal possible.

Budgeting Around the 20% Rule

There is no one-size-fits-all process to finding room for a monthly car payment in your budget.

Two people living in the same city bringing in the exact same income would still have vastly different monthly budgets. Personal finances are just that—personal. That means there’s no hard and fast rule to how much you should put towards your car expenses each month. However, there are certain guidelines most financial experts recommend, including the 20% rule.

Following this guideline, your combined monthly automotive expenses shouldn’t total more than 20% of your take-home pay. Again, because personal finances can vary so much from person to person, that number might not work for every car buyer.

If you live in a high-cost area where your rent or mortgage take up a large chunk of your check, or are working to pay off high-interest debt the fastest way possible, you’ll have to adjust that figure depending on your own budget. Start by creating a monthly budget, including all mandatory and discretionary expenses, to arrive at a number that will work for you and your financial goals.

Factor in Additional Expenses

Say your monthly after-tax income is $3,000. Using the 20% rule, your auto budget would be $600. But, that doesn’t mean you can afford a $600 car payment.

Before signing on the dotted line, you’ll need to consider the additional expenses that come with owning a car, including registration fees, car insurance, gas, tolls, maintenance and repairs. While some of these are one-time or emergency costs, others are recurring monthly payments you’ll need to factor into your budget. Depending on where you live, how much you drive on average and the condition of your vehicle, these expenses can total between $150 and $300 or more per month.

Finding the Right Loan Options

With a rough idea of how much you can afford to spend on monthly payments, it’s time to find a loan that fits your budget. Using a car loan calculator, you can estimate what your monthly payments will be at varying rates and loan terms. And, just like you’d shop around for the right vehicle, shopping around for a low-rate auto loan that fit your needs will yield the best results.  

Remember your total purchase price may not be the same as the price on the window of your new ride. A $15,000 vehicle may ring up closer to $20,000 after dealer fees and taxes, which means you’ll need a bigger loan. Alternatively, a hefty down payment or trade-in vehicle can cut down the amount you need to finance. For example, that $20,000 total price amount could come back down to $15,000 after a $3,000 down payment and $2,000 trade-in.

At the end of the day, budgeting for a new car is all about finding the numbers that work for you, your needs and your lifestyle. If working with a professional face to face is more your style, we’re always here to help.