Posted by ACCU Staff ● 7/7/20 10:00 AM

How Much Car Can Your Afford?

That new car smell can be absolutely intoxicating, and the comfortable driver's seat can entice you to lay out your entire savings into a new vehicle purchase. However, the sticker shock can quickly bring you back down to financial reality.

Many people will be shopping for a new car, knowing exactly the types of features they want, yet not know how much they can actually afford to pay toward the purchase price. While dealers will break down the monthly payments into amounts that seem reasonable, there are other costs that you seriously need to take into consideration before signing your name on the dotted line.

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Research All Costs

Before looking for a new car, you need to have a realistic outlook on just how much you can afford. In addition to the upfront money you will need as a down payment, you have to consider registration, insurance, and tags (each state has varying pricing for these items). Then you have to take in the incidental costs such as gas, maintenance, and upgrades.

Never base these costs on what you are presently paying for your current vehicle. If you upgrade to a more premium car, it may have higher gas mileage costs, premium fuel costs, and maintenance upkeep. Also, insurance companies will charge different premiums based on the type of car you want and the special features it may have.

Avoid Being Upside Down in Payments

Once you have an idea of how much you will pay for a car, now is the time to figure out whether you can afford that payment. You can figure this out by creating a list of the other debts you are paying, such as apartment rent, home mortgage, student loans, and credit card payments. Then you can compare all your debts against the amount of your monthly take-home pay. Normally, you don't want your car payment to go over 20% of your monthly salary.

Even if you are below the 20% threshold, you have to be careful not to become "upside down" in the deal. This situation occurs when you are paying more than what the car is worth for an extended period of time. You may do this by getting an extra-long loan term through the dealership to lower your monthly payments. While lower payments seem ideal, you will also be paying interest longer, which leads to spending more money than you want to budget out.

Also, you may become upside down in payments because you haven't completely paid off the previous car loan for your trade-in. For example, if you still owe $10,000 on your current trade-in, but the dealership only offers you $7,000 for your trade, you still have to pay off the remaining $3,000. Depending on your specific loan and buying terms, this amount may be due upfront or added to your new loan.

We’re Here to Help

Getting a new car can be an exciting time. Understanding your payments and loan terms in advance can allow you to figure out just how much car you can afford.

When you’re ready to begin looking for your next vehicle, stop by any branch or give us a call at 800-343-6328. We’re ready to help you get pre-approved and lock in a great, low rate.

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.

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