Figure out how much you can put into a car
Before you start shopping for a new or used car, you may want to first figure out how much you can afford to spend. If you have your finances in order from the start, it will make the purchasing of a new car that much easier and get rid of some of the stress you may run into at the dealership. Here are some tips to figure out exactly the amount you have to put into a vehicle – this way, you are also able to determine how much you will need from a new or used car loan.
Create a target monthly payment
Essentially, a target monthly payment is what you can afford to pay out each month. After taking into account tax, title and registration fees, you do not want this number to amount to any more than 20 percent of your monthly income after taxes are taken out. This is especially pertinent since this figure does not include gas, insurance or maintenance, which will likely affect your monthly budget as well.
Loan term and market finance rate
One of the first things to look into is how long you will have to pay off the car loan, which is recommended to stay within the traditional 60-month period. Those who stick it out longer risk paying too much interest to make the lower monthly payments worth it. If you have the option to get a shorter loan, you may want to choose this route, but keep in mind that it can greatly increase your monthly payments.
It is also important to figure out what the current market finance rate is, which the interest rate charged by lenders to borrowers who are in the second-highest credit tier. This tier is the most popular among those trying to buy a car.
Value of your trade-in
Car buyers should also factor in the trade-in value of their current vehicle. If you have a car to trade in, the money from selling the current model can be used as a down payment for your auto loan, whether you go through a dealership or if you sell it privately. This can lower the amount of the loan you'll need or give you a larger budget.
However, you do not want to forget about what you owe on the traded-in vehicle, as this will also be factored into how much you qualify for, as well as how financing will work with the new car loan.