Buying a car? How to calculate what you can afford
Vehicles, service plans, fuel and insurance are all expenses one needs to take into consideration when wanting to buy a car.
And before you can consider buying a car or applying for financing, you need to know that you have good credit record and an income that will support your new vehicle expense as well as your current expenses.
Buying a car cannot be done without some serious financial planning and budgeting. Cars are expensive but they can be affordable with the right strategy. All you need to know is how much you can afford for a car and there are many ways to calculate that.
The price of the car
The price tag advertised on a vehicle is only one cost involved in buying a car but it is the largest cost. You also need to keep in mind that you won’t be leaving the dealership with only the price tag value to pay.
Sales tax, registration and warranties (optional but recommended) will also be included. Not to mention the interest that will be accumulated on your loan over your payment period. That’s what will raise the total price of your car at the end of the day.
You need to keep in mind that whatever the advertised price of a car is, you can expect to be paying a fair amount more than that before you will officially own the vehicle. And it’s important to consider this because many people see a price tag and automatically think it’s “affordable” before the added costs are included. That’s how they find themselves unable to make their payments or sign the contract at the end of the day.
Your down payment amount
When calculating affordability, you should work with the advertised price of the vehicle when using the car loan repayment and book value calculators. So when you’re trying to figure out how much money you need for a down payment, you’ll subtract that value from the car’s price tag value.
When you need to take out a loan to buy a car, they automatically become more affordable when there’s a down payment to subtract. The reason being that whatever you can cover in cash – or, in other words, interest-free – you will be saved from having to pay interest on it and be able to reduce the amount needed for your loan.
Most people strive to make a down payment that is 20 percent of the car’s price. It seems like a lot of money but you will be saving money down the line. And most car dealerships will take the car book value of your trade-in vehicle and use that as part of the down payment.
So far, you know the price of the car and the down payment value you are able to put up. What comes next when calculating affordability?
Use a finance calculator
You have all the values you need to use a vehicle finance calculator to work out how much you can expect to pay every month for your car.
When you use a vehicle and book value calculator, you will have to insert the total cost of the vehicle you’re wanting to buy, put in the down payment or deposit amount (which the calculator will subtract before interest) and set the repayment period over which you’ll be paying off the loan. Finally, the finance calculator will set your loan amount to the interest rate and it will provide an estimate calculation of what you can expect to pay for the car per month. And that makes it easier for you to visualise the added monthly expense when calculated into your personal monthly budget.
Remember, if you choose a longer repayment period, it will be more affordable on a monthly basis but the total cost of the vehicle will be more due to interest being charged over a longer period.
Consider your budget
With a fairly accurate estimate of what your car will cost you every month, you need to turn to your personal budget and see if you have that money to spend each month.
Taking out a car loan means you’re going to be in debt for the repayment term and your other current expenses aren’t going to disappear. And while you have your budget open, this is where you include the extra costs of the vehicle.
Your service plan, insurance and monthly fuel expenses need to be accounted for in your budget. Adding these to the estimated loan repayment value will give you a total monthly vehicle expense that you can use to decide if you do or don’t have the income to cover the car costs, your living expenses and still have some cash left over to enjoy life with.