Buying a Car

Buying a Car: What Can You Afford

There's no sense getting all worked up about a car you can't afford. So save yourself some disappointment and figure out a payment amount you can handle before you start looking.

Break out your budget
Start with your budget. (You do have a budget don't you? If not click here for budgeting information.) How much room is there in your budget? Could you, for example, fit an extra $200 a month in your budget without strapping yourself too much or eliminating your savings? If so, can you fit an extra $300 a month in your budget? No? How about $250? Continue that process until you have a general idea of how much you extra room you have in your budget. That's how much you can afford to pay for a car every month.

Details, details, details
Before you get too excited about how much you can afford and start looking at the fanciest sports cars or most luxurious sedans, remember that your expenses will include not only your car payment, but also your insurance, gas, maintenance and other miscellaneous costs associated with operating a vehicle. As a general rule, the more expensive the car, the more it costs to insure and maintain it.

Operating expenses can be as much as one third to one half of the monthly cost of a new car. So take the amount that fits in your budget and multiply it by .66. That is the most you should consider spending on monthly payments for the vehicle to be able to afford operating expenses as well.

Last but definitely not least
This is going to hurt so let's just get it out of the way - you're going to need a big chunk of change for a down payment. How much? The bigger the better.

A dealership isn't going to give you a car with only a signature as a promise you'll pay for it later. But cash is a great symbol of your commitment to make all the payments. That's the basic idea of a down payment.

To get a loan for a car, and often for a lease, you'll probably need to make a down payment of around 10% of the total price of the vehicle. The larger your down payment, the smaller your monthly payment will be and the less you will pay in total for the car in the long run. But make sure you don't cripple yourself or deplete your savings account with too large a down payment. Find a comfortable balance.

We'll discuss exactly how a down payment affects your financing and monthly payments later on. But for now it's important that you know you will need a large sum of cash when you buy a car. If you can, delay purchasing a car so that you have some time to save up a decent down payment.

Now that you know how large a monthly payment you can afford, you can start looking to find out how much car that will get you.