How Do You Determine How Much Car You Can Afford?

Planning to drive off in a new set of wheels? Before you hit the road, let's stop to assess your finances. Understanding your financial outlook is crucial when making a large purchase. We'll delve into calculating your monthly income, factoring in all expenses, and setting the stage for a smooth ride to your new car.

Assess Your Financial Situation

For many first-time car buyers, the allure of walking into a dealership and driving out with the car of their dreams is a powerful draw. But before you sign on any dotted line, it’s essential to know exactly how much you're making each month and what you can afford. This is where a little number crunching can go a long way, ensuring that your joyride doesn’t hit a financial roadblock.

Calculate Your Monthly Income

The first figure you need to establish is your total earned gross income before deductions. This includes your salary from your primary job, any bonuses or commissions, and any additional income from freelance work or a second job. If your income is not fixed, take the average over the last six months to get a more solid picture of what you can consistently count on.

Calculate Your Monthly Expenses

Once you have your gross income, you need to understand the deductions that will be taken off the top before you even see your paycheck. These typically include federal and state taxes, Medicare and Social Security deductions, and any pre-tax benefits like medical and retirement contributions.

Don’t forget to account for any other fixed monthly expenses like rent or mortgage, utilities, insurance, and groceries. Calculate how much is left after subtracting these expenses from your post-deduction income. This is your discretionary income—what you can use for car payments.

How to Determine How Much Car You Can Afford

Looking at your discretionary income will give you a solid foundation for how much of a monthly car payment you can afford. It’s also recommended that your car expenses do not exceed 10% of your monthly income. Expenses include:

• Monthly car payments
• Fuel cost
• Vehicle insurance

• Vehicle maintenance

To get a better handle on how much your monthly car payments could be, use an auto loan calculator to see how down payments, interest rates, and term length affect your payments.

The average length of a car loan depends on whether the vehicle purchased is new or used. The average auto loan term for the fourth quarter of 2023 for new cars was 67.87 months, and 35.98 months for used cars.

Keep in mind that opting for a longer loan term may yield lower monthly payments but result in higher overall interest payments.

Other Factors to Consider

Beyond the monthly financing, remember to budget for:

• Down payment
• Sales tax
• Registration fee
• Title costs
• Dealership fees
• Insurance premiums
• Routine maintenance and repairs

• Value of any vehicle you’re trading in

Set Your Target Price

After considering your financial situation and all the expenses, you should have a realistic price range for your car purchase. Once you have a budget, aim for something below your budget line to accommodate unforeseen expenses and additional costs.

Outside of price, you should also consider what you’re using the vehicle for. Are you just driving to work? Are you planning to use it for routine canoe trips or taking family vacations? Make a list of non-negotiable features and options your car should have. This can help narrow down what make and models you’ll be researching.

Get Pre-Approved for an Auto Loan

You don’t have to go with whatever financial institution the dealership pushes on you. Before dealing with any salespeople, explore the different financing options available. Other institutions include:

• Banks
• Credit unions

• Online lenders

Shop Around for the Best Car

Car shoppers have more resources available to them than ever before for researching vehicles. Before walking into a dealership, consider the following information:

• Reviews
• Features
• What your trade-in goes for
• Fuel-efficiency
• Maintenance costs

• Resale values

Online resources include:

• Edmunds: https://www.edmunds.com/
• CarMax: https://www.carmax.com/
• Car and Driver: https://www.caranddriver.com/

• J.D. Power: https://www.jdpower.com/

Looking at a competitive dealership’s inventory can also give you an idea of the asking price for vehicles and help when negotiating a better deal.

The Importance of Flexibility

Your dream car may be out of reach depending on your current financial situation. It’s important to be realistic and flexible when setting expectations. The goal should be getting the vehicle you need in a financially responsible way. Being financially prepared for the unexpected when buying a car is crucial because it:

• Safeguards your budget and prevents debt accumulation
• Preserves the value of your investment
• Allows flexibility in handling expenses when life changes

• Provides peace of mind and enhances overall financial well-being

Secure An Auto Loan

When you’re ready to start your car-buying journey, talk to us at Community First Credit Union. Our team of financial experts can help you find the best auto loan for your needs. We have affordable auto loan options as well as auto loan refinance options.

You can get $250 cash when you refinance an auto loan you have elsewhere, and potentially lower your payment and rate. Whether you’re purchasing or refinancing, enjoy no payments for 90 days.

Contact us today to apply online or schedule an appointment with one of our experts.