Staying Within the Budget: Learn If You Can Afford That New Car

Car salesman handing over car keys to buyer

Buying a car is based on two factors: one, it’s a necessity, and two, it’s a reward you want to get for yourself. No matter the reason, it is important to remember that you shouldn’t bite more than you can chew.

This means not buying a car that you cannot afford. If you only have $350 a month to spare, then that’s the car you can afford. Don’t go chasing after a BMW and letting off $500 a month from your personal monthly budget.

Want to buy a van? There are many Sprinter crew vans for sale in Utah that you can get for a great deal. The devil, they say, is in the details. Discover the things you must watch out for and consider when you want or need to buy a car or a sprinter van.

Remember the 20-4-10 Rule

Ramit Sethi, the best-selling author of “I Will Teach You To Be Reach,” has this to say to CNBC when it comes to applying for a car mortgage: put a 20% downpayment on a four-year loan that will require only 10% of your monthly gross income.

Many people are being hooked into those zero downpayment offers because they can take the car home without paying a dollar for it in the first month. The problem with this is that the principal amount of the loan will balloon and you would need to pay for higher interest. If you plan to buy a car, save money several months before you apply for an auto loan. If you want a $30,000 car, make sure you have $6,000 for the downpayment.

Currently, the most popular auto loan has a term of 72 months or six years. That’s just too long. If you can’t afford to pay off the principal and the interest in four years or below, then you might need to find a cheaper car. Choosing a longer term means your monthly payment will be lower, but it also means you’re paying for a higher interest rate in the long run.

The monthly expenses that your new car will incur—and this includes gas, insurance, repairs, and fines—should only be 10% of your gross monthly income. That will leave you enough money for your monthly expenses and some more to put in the bank for savings.

Shop for a Car Loan

Many banks and financing institutions offer vehicle loans. Do not apply for the first bank you see. Chances are, you are going to find one that offers a lower interest rate. Applying for a car loan should be like choosing a restaurant to dine in. You should weigh the pros and cons—the interest rate, the proximity of the bank, the terms, and the freebies that come with the loan.

Used vs. New Cars

Couple looking to buy a car

If you are going to apply for a car loan for a used car, make sure the loan won’t outlive the car. This means the car should be in good condition for the next four or more years. Otherwise, you will end up paying for something that is no longer in good working condition. Or worse, you’ll end up paying for the loan and the repairs of the secondhand car.

The thought of owning a new car can make you forget the reason you want or need to buy one. A car loan is a big responsibility that you will need to take in for the next four years. Spend time researching the best loan terms and the best car for your needs.