Few of us can do without cars.
Many of us need them to get to work, and to have a certain independence when it comes to travel.
And, the reality is that many of us have to borrow in order buy a car.
Before you buy a car, you need to sit down and decide how much you can afford to spend on a vehicle.
Make sure that you aren't causing yourself financial hardship when buying a car.
Auto Loan = Interest Costs
The easiest way to figure out how much you can afford is to save up the money, and only buy what you have the cash for. However, the reality is that you are likely to borrow in order pay for your car.
And that means that you will pay interest.
Don't forget to factor in the cost of interest on your loan. It will contribute to your total cost. Before you start car shopping, go online and use an auto financing calculator to determine how mush you will pay with interest. This will affect how much you can truly afford when it comes to buying a car.
Total Cost vs. Monthly Payment
You should also break down your car loan before you proceed to look at cars. First of all, think about the total cost of your car, and how that translates into your monthly payment.
The reality is that you will need to know how your car purchase is going to affect your monthly budget. Sit down with your budget and decide how much you can easily handle each month, and the maximum total cost of the car (principal + interest).
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After you calculate an auto payment that makes sense for you, you need to stick with the plan. Don't let auto salespeople convince you to do something different. When negotiating with the dealer, you want to focus on the total cost that you worked out. Once you start talking monthly payment with a car salesperson, you run the risk of getting a 72 or 84 month loan — with a higher interest rate — rather than a 60 month loan with a lower rate. A longer loan, even at the same rate, means a higher total cost. Do your homework ahead of time, and stick to your decision.
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Insurance and Maintenance
Don't forget about the insurance and maintenance costs that come with car ownership. When you have a car, you need to pay to have it insured, as well as pay for registration. You will also need to pay regular maintenance costs and repairs. The true cost of ownership when you buy a car is probably higher than you might imagine. That's the case even if you're buying a new cheap car.
One way to deal with these costs is to start a “car fund.” Each month, put money in a high yield account. This money can be used to pay insurance premiums, keep up with maintenance, and pay for repairs. You can also use the money to help you pay for yearly registrations, safety inspections, and property tax.
Add up all the costs associated with owning a car, and make a determination as to what you can afford. Once you have this information, and you have a good idea of what car you prefer, you will be ready to get the best possible deal on your loan.
Have you bought a car lately? What did you come up with when you asked yourself the question, “How much car can I afford?”.