Just because you can doesn’t mean you should. It’s a pretty good rule of thumb that can be applied in almost every aspect of adult life. Maybe you can finally afford to drive a much nicer car than you have been and you’re ready to start weighing your car-buying options. Before you ever step foot on a lot, or fall in love with a shiny new car, you should take a close look at just how much car you can really afford. The Internet is full of affordability calculators on sites like Cars.com that will help you figure this out.
To get started, you should take a close look at your income versus your financial obligations. How much is available each month to make a car payment that still leaves enough cash on hand for other necessities in life? When you’ve arrived at that number which would be comfortable, enter that into an affordability calculator. If you’ve been smart enough to put cash away for a down payment, this will impact the overall affordability of practically any car you choose. These calculators also consider trade ins if your current vehicle has any substantial value. Remember that if your current vehicle still has a loan, that loan will need to be paid off before any trade in proceeds can be applied to the cost of the new vehicle you’re considering. You will also need to figure out the sales tax rate where you live, the interest rate that you could conceivably get from a lender and the length of time you’re willing to finance the vehicle.
All of this information will generate one very important number – a maximum loan amount. This amount represents the total purchase price of a vehicle that you could reasonably afford based on the information you provided and in addition to your other obligations. It should represent to you a cap that you should not exceed when looking for potential new cars. This number is your car buying budget and it should be the absolute most that you spend on a vehicle to remain financially responsible.