Car Shopping? How to Know How Much You Can Afford

If you’re ready for a new car, or a new-to-you car, you might be unsure where to begin your search. Undoubtedly, once you start mentioning to your friends and family that you might buy a car soon, a flood of opinions comes your way: What car do you want? My friend has a _____ and loves it. Have you looked at those? The questions are never-ending. And, worse, the questions can skew your perspective before you ever have a chance to gather your thoughts.

Between outside opinions, television ads, salespeople, and Internet searches, buying a car becomes a difficult decision. You want the car that fits both your needs and your budget, but finding that balance can be challenging. The key is to arm yourself with the right information before you’re sold on any one vehicle. With all the facts, you’ll know precisely how much car you can afford before you take action.

Here’s how to determine how much you can afford before you head to the dealership.

Before You Shop

Car shopping should be exciting! And it can be. If you know what you can reasonably spend, buying a car becomes exponentially less stressful. Before you step foot on a car lot, take a look at these six tips to consider.

Take a Step Back

As with any large financial commitment, try your best to work with logic rather than emotion. You should be excited about your new purchase, but don’t get wrapped up in the car you want before you know how much you can pay. There are undoubtedly fantastic options within your price range, but you may overlook them if you already have your heart set on something less budget-friendly.

Analyze and Revisit Your Budget

Having an up-to-date budget is the foundation of any purchase, big or small. Review your bank transactions and credit card statements to be sure you have a complete picture of how you spend. When you see your money written in black and white, you’ll have a more objective view and be less likely to make a purchase outside of your price range.

Tip: Make sure that your budget includes how much you actually spend, not how much you want to spend. Having an accurate picture will go further in creating a spending strategy.

Estimate the Loan Payment You Can Afford

Once you have a current budget to work from, determine how much you can reasonably pay and for how long. Use this number to estimate a total loan amount that you’re comfortable with and that fits into your budget. Many car sales websites, such as Cars.com, have car payment calculators to help you visualize how much you would spend based on your down payment, interest, sales tax, car purchase price, and other crucial factors.

Consider the Expenses Related to Your Car

Your car’s expense is more than the sticker price on the window. You’ll spend on gas, registration fees, maintenance, insurance, repairs, and more. Those costs add up over time and can lead you to spend more than you expected. If the car you’re looking at buying doesn’t get good gas mileage, for example, you may need to adjust that area of your budget. Alternatively, the factors we mentioned vary from car to car, so it’s wise to research an estimate of the related expenses for each before you make the commitment.

Aim to Spend Less Than You Can Afford

To help you balance unexpected expenses that come with purchasing a new car, search for something under your budget. So, if you can afford a $30,000 car, you might consider buying a vehicle between $25,000 and $28,000. By leaving yourself a cushion, you’re protecting your financial health from forgotten fees and add-ons that might affect your car’s final price.

Spend No More Than 20% of Your Income

While there isn’t a hard rule, many financial advisors suggest spending 10% or less of your monthly income. If you simply cannot make that number work, spend no more than 20%. These numbers should include your car-related expenses as well (see point number 4).

Tip: Some prescribe to the 20/4/10 rule, which means they pay 20% down, keep the loan for no more than four years, and maintain vehicle expenses at 10% or below.

Each of these points back to one central theme: be aware of your spending. The more you know about your budget and how a new car will affect it, the more confident you can be while shopping. While this process will look different for every person, knowledge is always a good starting point.

Get Help Making an Informed Purchase

Even the best car-shopping tips are relative. What works for someone else may not work for you. These six pieces of advice will get you started, but your finances are unique. If you’re ready to take control of your finances, a financial advisor is your next step. An advisor acts as your financial ally, guiding you to better understand your finances and build a long-term strategy.

Southwestern Investment Group works with you to build a well-rounded, comprehensive picture of where you spend your money. We teach and empower so that you can make the difficult financial decisions with ease.

With an ally, you no longer have to stress over if you’re heading toward a financial burden. Contact Southwestern Investment Group to set up a consultation with an advisor.

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