4 Tips for Determining How Much Car You Can Afford

Purchasing a car is not only a big decision, but it can also be a stressful one when it comes to finances. A car is an expensive purchase that requires careful planning and consideration. Whether your car is broken down and you need a new one, or you're planning to upgrade to a newer or nicer car, the first step should always be to determine how expensive of a car you can realistically afford.

Before you make a quick purchase, check out these four tips for determining how much a car you can afford. With these expert tips, you will be able to comfortably shop for a car within your budget. Shopping within your budget can help eliminate financial stress and help you set realistic expectations.

Consider your Annual Income

There are various rules of thumb when it comes to determining how much of your annual income should be allotted to your car budget. These range anywhere from 10% to 50% of your annual income, depending on a variety of factors.

One common rule, known as the 10% rule, may be helpful if you're a frugal shopper. This means you can set aside no more than 10% of your annual income for the purchase of a car. Though this sounds good, it may not really be feasible for people with lower incomes.

The 30% rule is a more realistic way to set a car budget. This includes allowing 30% of your annual income for your car. This can also help you set aside money for insurance, maintenance, gas, and other car-related expenses. The number you come up with will help you get an idea of what type of purchase price you can look for when car shopping.

Determine Monthly Payments & Loan Amounts

Once you've determined a ballpark range for the car's purchase price, you'll need to figure out how much the monthly payment will be. This will help you realistically see how much of your monthly income will be going towards your car payment. One great way to get started is to use a personal finance calculator, like this one provided by myautoloan.com. This calculator will help you get an idea of how much your monthly payment will be depending on several factors, such as loan amounts, interest rates, and more.

How much you will be approved to borrow for a car may depend on several factors. These include your current credit score, the length of the desired loan term, and whether you're purchasing a new or used vehicle.

Consider Extra Costs

Though everything may seem black and white on paper, owning a car always comes with expenses that can randomly pop up. Trying to consider these factors before purchasing a car is a smart way to make sure you're making the right car choice for your budget. One consideration to consider is the price of insurance. Certain cars may be more expensive to insure, which will change your monthly budgeting plan. Need help with budgeting out car insurance? Shop car insurance with this useful car insurance quote comparison tool.

The degree of gas mileage a car gets is also another important factor to consider. Remember, cars with good gas mileage will allow you to spend less on a gas monthly, especially if you are a frequent driver.

Be sure to also factor into account other extra costs that are associated with buying a car. One factor is sales tax, which will vary depending on where you are purchasing the car. Registration fees can also quickly add up, depending on which state you're registering the vehicle in. There are also documentation fees you will need to pay as part of the purchasing process.

Explore Financing Options

When determining how much car you can afford, you will also need to factor in if you're planning to purchase or lease a vehicle. Both leasing and buying a new vehicle have advantages and disadvantages. Depending on your needs, one option may be better suited for your individual budget needs. Leasing is a great option for drivers who want a lower monthly payment and want to be able to frequently switch up what car they're driving.

If you are someone who prefers to stay in your vehicle for more than 3 to 5 years, buying may be a better financial choice for you. Buying allows you to drive as much or as little as you'd like, as you won't be limited by yearly mileage constraints. In addition, you won't be charged for wear and tear on the vehicle like you will when returning a leased vehicle.

Using these four tips, you can easily shop for your next car without stressing over your budget. Knowing what you can afford can help you choose a car that's perfectly suited for your budget without aiming too high above your means. Give these four tips a try for your next car purchase!