Are you wondering how much car you can afford? Understanding how car loans work can ease the buying process, giving you a clear understanding of how much you’ll owe monthly and how long it will take to pay back the loan.
With that information in hand, you can plan your car buying adventure with a clearer sense of what types of cars to look at and what price you can afford to pay.
Knowledge Is Power
A lot of people do not enjoy shopping for a new car. They often feel as though they’re being fleeced by the car salesperson. They leave the showroom feeling as though they were both literally and figuratively taken for a ride.
Before you approach any dealer, it makes sense to have a clear-eyed view of how much you can afford. There are some easy calculations to help you make an informed decision.
The general rule is to spend no more than 35 percent of your pre-tax annual income on a car. That may seem right to you or like a lot of money. You can always reduce the sticker price of the car by negotiating a better deal, using cash to offset some of the cost or consider buying a used car instead.
Consider pre-approval for a car loan from your local credit union. That way you’ll know what your credit score is and what interest rate you’ll pay. You’ll know your interest rate and the length of your loan, here’s what you’ll need to use a free auto loan calculator to determine how much you should spend.
- Annual pre-tax income
- Loan interest rate
- Loan length in months
- Down payment
Note that this will be a maximum amount. Based on your financial circumstances, you may choose to spend less. If you want to spend more, you’ll likely need to put down a larger down payment.