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How to Determine Your New Car Budget

Shopping for and leasing/financing a new car is an exciting time but one that takes careful planning. There is more than just the sticker price you need to budget for. You also have to calculate in tax, registration fees and anything extra like extended warranties. Calculating mindfully, what you can afford can land you a car sooner than you realize. Determining how to budget for a new car is simple.

Determining Your Budget

Purchasing a new car you should plan to spend %10 – %20 of your total monthly income on your automotive expenses. Depending on the term of the warranty, you may be covered for major repairs. However, the warranty might not cover any routine maintenance such as; oils changes, battery, windshield wipers or tire replacements. Be sure to inquire about basic and extended warranties when speaking with the sales representative at your car dealership. When setting up a budget for a car into your monthly expenses, set aside some extra for the needed maintenance on your car to keep it running smoothly. This is important to help maintain the life of your vehicle to last longer and keep it in great condition.

If you have a debt already and unsure about adding a car to the mixture, devoting 36% of your total income to your debt balance is reasonable for most individuals. For example: take any debts that you may have including mortgage, credit cards, student loans and any other loans; combine them together and take 36% of your income to pay towards the debts total. If your monthly income is 2,500, you will calculate (2,500 x .36) = $900. Let’s say you have a total of $650 in debts you are already paying each month, this leaves $250 towards a new car payment and 1,600 left a month for other expenses. This is just an example of how you would determine a budget for a new car. Know that everyone’s situation is different, you will have to calculate your own income and debts.

Long vs. Short Term Financing

If you qualify, a long term loan is to finance the purchase of a new car, buy a home, consolidate debt or purchase a new car. A long term loan typically has competitive interest rates, so calling around to different financial institutes is ideal to find the lowest rates. Long term loans are spread out over a longer period of time, which makes smaller monthly payments and easier to budget for.
The downside to a long term loan is, you will have to complete a lengthy application. The interest rates may be lower and spread out over time, but they add up and may end up being almost double the loan amount. And there is the risk of losing your car if you have trouble paying off your loan.

Short term loans or often known as payday loans and are great for those times when you need to clear up an outstanding balance for a bill. The application process is generally simple and takes little time. There are higher turnarounds for short term loans as you don’t need great credit to be approved. If customers have been denied a long-term loan from the bank, they are often approved for a short term loan if they can prove they have a steady income.
The thing about a short term loan is it’s for a “short-term”. These loans have to be paid back within two-weeks to 28 days from taking out the loan and the amount is usually only about $1,500 max.

Not an option if you are wanting to borrow for a larger more expensive item, like a car. When using credit you should always have an objective look at what you need to know about auto financing.

Insurance Expense

Aside from a loan or saving for a vehicle; you have insurance to add to your monthly expenses. When buying a new car be prepared for higher costs than a cost for a used car. The cost for your coverage will be based on the collision and comprehensive coverage in your insurance plan. Collision is for damage caused by an accident and comprehensive is coverage for theft, fire, and natural disasters. It is best to get the best coverage for your vehicle. If anything were to ever occur, this coverage will save you a pretty penny in the end. Once you have found the vehicle you want, call around to your local insurance companies to get quotes. Don’t go with the first company you find; you will notice that some insurance companies offer the same or better coverage for a less-expensive cost.

If you are unsure if a new car can fit into your budget, using a loan calculator can help you determine your borrowing capacity. It is also very important to be aware of the benefits and downfalls of borrowing. In addition, you need to be very strict and disciplined to stay within your budget.