A new car may be in your budget, but you may be wondering how much of a loan you can afford. While $20,000 may not sound like too much, the interest rate could cause the monthly payment to be out of reach. How do you determine how much you can afford. Here are a few tips on how to determine your maximum car purchasing budget.
Prepare a Budget
The first thing you need to do, if you haven’t already, is create a budget. A budget should include all your bills, money for savings and retirement (if this gets paid after you receive your paycheck), money for variables (groceries, etc), and any other expenses you have. You should overestimate on the variables to ensure you have enough money and never skip putting money back for emergencies. Once you have all the items accounted for, add up the total and subtract from your income. What’s left is how much you have afford each month. However, you must consider how much the insurance will cost and any additional expenses, such as a larger gas bill for an SUV.
Check Your Credit Score
The next step is to check your credit score. Your credit score not only determines your credit worthiness, but also determines how much your interest rate will be. Those with scores under 700 can expect large interest rates unless they have a cosigner.
View Interest Rates
Once you have your credit score, check different websites to determine what interest rate you can expect. If you subscribe to a credit score alert service, you may be able to find this information on the company’s website.
Use a Car Loan Calculator
There are a number of loan calculators online that will give you a better idea of how much monthly payments will be based on the price of the car, your interest rate, your down payment, and the number of months of the loan.
Consider Your Down Payment And/Or Trade In
The last step is to consider your down payment and/or trade in, if you have one. Some car dealerships will give a loan without a down payment, but it will increase your payment. In some cases, you may even want to choose a loan that meets your monthly budget before considering the down payment. This better ensures that you don’t get in over your head.
Buying a new car requires a bit of research to determine how much you can really afford each month. While this process does take a bit of time, it can prevent you from buying a car that you couldn’t afford and going through repossession.
About the Author: Carey Doersam spent a lot of time reviewing her budget and bills before settling on a new car budget. She also worked on negotiating emergency road service plans, warranties, and accessories so she would not have to spend extra.