Using your income as a guide for your car purchase.
Buying a car, whether new or used, is a significant investment. You want to make sure you don’t overextend your finances, but you also don’t want to settle for a car that doesn’t meet your needs just because it’s affordable. Use your income as a guide to find the right balance.
Put Finances First
Though buying a car can be an exciting experience, it’s easy to get caught up in the latest features and models. Start by determining how much you can reasonably pay each month, while still covering your other bills. Be sure to factor in that payment to a loan with a reasonable end term. A longer loan term means paying more in total and exposing yourself to more financial risk.
Crunch the Numbers
To get a clear picture of what you can afford, examine your monthly budget closely. If you haven’t been tracking your expenses, now’s the time. NerdWallet’s Philip Reed suggests allocating your take-home pay into three categories: needs (50%), wants (30%), and savings (20%). Keep your car payment under 10% of your monthly income and try to keep total car-related expenses below 15-20%.
Factor in the Complete Cost
Your car payment is just one part of the equation. Car insurance, fuel, maintenance, and repairs also need to be factored in. Plan for these additional expenses so you don’t end up with unexpected costs. Consider budgeting an additional 5% of your take-home pay for these car-related expenses.
Keep Your Budget Confidential
Once you’ve set your budget, keep it private when negotiating with car salespeople. Consumer Reports recommends not sharing your budget or how much you can afford, so you’re not pushed into a longer loan term or a more expensive car than necessary.
A car is a necessary purchase, but it shouldn’t stretch your finances too thin. By sticking to your budget and considering the full costs of car ownership, you can make an informed purchase.
Ready to make your car purchase?
Five Star Bank offers auto loans that can help you finance your next car while keeping your budget in check. Contact us today to explore your loan options!
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