How do I know how much car I can afford?

Assuming you’ll buy with a loan, you will want to have a monthly car payment that will fit within your current income, after considering all your other expenses. Don’t make the mistake of buying based on future expectations — a forthcoming raise, a new job, or other potential improvements in your finances. Your expectations might not come to reality and you’ll be stuck with a car you can’t afford. Base your purchase only on current, stable finances.

Debt and Income
Most lenders look at your income and debt, as well as your credit score, to make a decision about how much you will be allowed to borrow, or if you will be approved at all. If your combined monthly debt (credit car payments, rent, etc.), including the new car payment, exceeds about 36% of your gross monthly income, you may not be approved. If a lower car payment will get you in under 36%, then you might be approved but at a lower loan amount.

Shop for Auto Loans
Shop at local banks, credit unions and loan companies for your auto loan. Since the bank or loan company will check your qualifications, you’ll know fairly quickly how much car you’ll be able to afford. This will allow you to go shopping looking at only those cars you know you can afford. Just be aware that each loan application causes a query against your credit history. Multiple auto loan queries within a 45 day period only counts as a single query and lowers your credit score only by a few points. Many people hesitate to shop for loans, believing that each application hurts their score, which is not the case.

Use a Calculator
If you want to begin by doing some of your own affordability calculations, use an online auto loan calculator to play around with various car prices, loan terms, and down payments to find out how much car you can afford, based on an affordable monthly payment.

Don’t Negotiate Payments
One caution: Don’t negotiate monthly payments with a car dealer if you don’t understand how he is calculating that payment. Instead, negotiate car purchase price and let the dealer tell you what monthly payment it produces. If the payment is too high, go back to the selling price and get it lower, if possible. Getting an affordable monthly car payment doesn’t mean you’re getting a good deal on the price of the car.

Other Costs That Affect Affordability
Also don’t forget that you will have other expenses associated with the ownership and operation of your car. One of the most significant is auto insurance. For first time drivers, insurance can be very expensive. Also consider gas, oil, maintenance, annual inspections and taxes.

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