What car can 
I afford?
Don’t just look at numbers today. Consider how the cost of buying a new car may change over the coming years.
For example, if you don’t have a mortgage payment today but are hoping to buy a house in the next few years, you’ll want to leave ample room for that dream. Otherwise, the pain of having your mortgage application in the future could overshadow any joy you get from today’s new car smell.
When deciding how much money to allocate to your new ride, it’s also important to factor in other financial goals like college or retirement savings and an emergency fund.
When figuring your monthly car payment average, this car affordability calculator can help you determine a potential loan and payment amount.
If you’re falling short and already have a car, you may want to postpone replacing it until you strengthen your financial position. If you must replace your vehicle now, consider buying a less expensive car.
Considerations for families
When families have multiple drivers, the car payments can add up. Consider the following guidelines to help your family stay on budget.
- If one or more of your cars are currently paid off, make a “payment” to a savings or other account to let cash build up over time. “That way you’ll have a nice chuck of money to put down on your next car when the time comes,” Angel says. “Using this strategy may mean that you can pay cash for your next ride, eliminating car payments forever!”
- Keep your overall costs lower by rotating your car purchases so that you only have one car payment at a time.
- Plan ahead for new drivers hitting the road in the next couple of years. Remember that even if they’re getting a hand-me-down car, they’ll still add insurance, fuel, and maintenance costs.
Avoid overstretching your car payments
In trying to keep your car payment low, you may be tempted to stretch your payments out over a longer term. It’s a trend. While four-year plans used to be common, the average term has gotten longer. Lenders are even going so far as seven years for newer vehicles.
- The longer the term, the more you’ll pay in interest.
- You increase the risk that over the coming years your car will be worth less than what you owe on it because early payments are comprised mostly of interest rather than principal.
Being “upside down” on your loan could be a major disappointment if when selling your car a few years down the road, or if it’s totaled, you have to come up with additional funds just to pay off the remaining balance.
When you’re at the dealership, be aware that salespeople tend to focus on the monthly payment rather than negotiating the overall price of the vehicle. A common tactic is to make the payment fit your budget by stretching the loan out over as long as possible to secure the sale. Don’t get caught up in the pressure. Remember: Your salesperson won’t be paying on this car seven years later, you will!
Since new cars lose a big chunk of their value the moment you drive off the lot, buying a used car may be a smart move.
You can gain extra peace of mind by choosing one that comes with a warranty – or you can buy a warranty of your own. Either way, consider having a trusted mechanic inspect it before buying. Ask for a vehicle history report, which some dealers will supply at no cost.