Buying a car isn't as simple as looking at the sticker price. Whether you buy the car outright or take out an auto loan, you still have fees, insurance, and maintenance to consider. There are a lot of pieces to the car financing puzzle!

So, how much car can you afford? This is something you’ll want to consider before showing up at the dealership. There are some steps you can take to answer that question and ensure you are prepared to pick out a vehicle that matches your budget and lifestyle.

Determine Your Monthly Budget

If you haven't done so, now is a great time to figure out your monthly budget. Add up your income and revenue then subtract all your expenses, including rent or mortgage payments, utilities, food, clothing, and entertainment. 

Be sure to leave some wiggle room for unforeseen expenses and all those little things you might have forgotten to include. Also allow room for savings and investments, when possible.  

If you're the head of a household, it may take a little longer to factor in all the costs of everyone in the family. Still, it's a useful exercise that will bring you greater security in the long run.

Identify Extra Funds

Once you've got all your income and expenses down on paper, you'll hopefully see that you have some money leftover. This extra money could go toward your monthly car payment. 

If you're not sure how much of your extra cash you ought to spend on a car, you could reach out to a financial coach for some helpful tips. 

Calculate Your Total Loan Costs

The average monthly payment is $575 for new cars and $430 for used cars. But this isn’t the answer to how much car you can afford. Your actual car loan consists of many factors, and all parts of the loan should be considered. 

Interest Rate 

The interest rate you get will affect your monthly payment as well as the total amount you will pay over the life of the loan. Interest rates are determined by: 

  • Credit score: The higher your score, the lower your rate. 

  • Choice of vehicle: You might get different rates depending on the age of the vehicle or even the model. 

  • Term of loan: You will likely pay less interest for a shorter term. 

  • Lender: Credit unions may offer lower interest rates than other financial institutions or dealerships, so be sure to shop around. 

Down Payment and Origination Fees 

You can still get an auto loan if you don't have any savings for a down payment. Just find a lender that offers $0 down financing on purchases. And try to avoid origination fees, annual servicing fees, and any other hidden charges. 

Use an Auto Loan Calculator

At this point, you'll be ready to punch some numbers into an auto loan calculator

You can use the calculator in two ways. In both cases, you can play around with the term and interest rate to see different options:

  • Calculate for payment: Enter the purchase price of your dream car and keep adjusting it until the calculator shows a monthly payment you can afford.

  • Calculate for price: Enter in the monthly payment you know you can afford and see what purchase price it generates.

Factor the Total Cost of Buying a Car

By now you will have a fairly solid idea of how much car you can afford. But there are a few more costs to keep in mind before you apply for your auto loan, including:

  • Taxes and registration fees: These vary from state to state so be sure to check what you'll owe up front and annually. 

  • Insurance costs: You'll need a minimum of liability insurance and you might want to consider comprehensive insurance and other protections.

  • Gas: If you didn't add gas into your monthly budget, be sure to factor it in now.

  • Maintenance: Expenses will vary depending on the age and model of your car. Do some research and estimate the costs of ongoing upkeep and repairs.

How Much Car Can You Afford? Let Arbor Financial Help!

After finishing your calculations, you should be close to figuring out how much car you can afford. But what if you still have questions? Arbor Financial Credit Union is here to provide support and assistance so you are prepared in any situation.

Before heading out car shopping, it’s a great idea to get pre-approved for your auto loan so you can enjoy sizing up all the cars at the lot without worrying about how you're going to pay. Click below to find out more!


THE BENEFITS OF GETTING PRE-APPROVED FOR AN AUTO LOAN

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