These days, most of us base our budgets on what we can afford on a monthly basis – without much attention paid to what it’ll cost us in the long run. We pay monthly for subscription services or TV equipment like cable boxes and DVRs. Some of us even pay monthly fees for online meditation courses or food delivery services, all without taking into consideration the annual cost of these services.
The same holds true for auto loans, which is causing problems due to these four facts according to Kelley Blue Book:
- The average price of vehicles hit an all-time high of more than $36,000 in 2018
- Drivers are buying the larger, more expensive cars/SUVs
- Interest rates are rising which increases the amount a shopper needs to borrow
- Lenders are extending their loans to record lengths
Edmund’s, the car-buying advice site, states that new car buyers pay an average of $551 per month for 69 months.
Sure, at the time of this writing, the economy is doing okay. However, the economy runs in cycles and if a downturn begins to emerge, car owners might start having problems paying these high monthly auto loan costs. So do you know how much car you can afford?
Follow these steps before purchasing a car to help keep your monthly payments affordable – now and in the future.
- Calculate the monthly car payment you can afford. This will help you get a “feel” for your target payment.
- Calculate the price of the vehicle you can afford.
- Use the calculators above while keeping an important rule of thumb in mind: try to spend less than 10% of your monthly take-home pay on your car loan payment.
- Determine how long you want to be making this monthly payment. NerdWallet recommends maximum loan terms of 36 months for buying a used car and 60 months for new cars.
- Once you’ve established how much car you can afford and how long you want to take to pay it off, you’ll have a realistic perspective on the purchase price you should consider. Remember to include the extra costs involved with a car purchase, namely: sales tax, registration fees and documentation fees. Depending on where you live, these could add up to $2,000.
Now that you’ve figured out where you stand as far as affording your car, it’s time to find the car you want! Once you’ve narrowed down your choices, you can shop for these cars in person so you can see them and drive them.
Wouldn’t it be great to walk out of a car dealer with a car that you not only love but one you can afford? If the answer is “yes”, read numbers 1-5 above one more time before you begin shopping for a car.
myFICO Forums has stories from members who have gone through the auto loan process and can offer some great advice. Check them out for yourself!