Determining How Much You Can Afford for a Car

 Determining How Much You Can Afford


Before financing or leasing a vehicle, make sure you have enough income to cover your current monthly living expenses. Then, finance new purchases only when you can afford to take on a new monthly payment. The “Monthly Spending Plan” is a tool to help determine an affordable payment for you.

The only time to consider taking on additional debt is when you’re spending less each month than you take home. The additional debt load should not cut into the amount you’ve committed to saving for emergencies and other top prioritiesor life goals. Saving money for a down payment or trading in a vehicle can reduce the amount you need to finance. In some cases, your trade-in vehicle will take care of the down payment on your vehicle.

have left after taxes and other deductions have been made.you’ve made to expenses and credit obligations. Be sure to adjust any expenses, like vehicle maintenance and
insurance expenses, which might go up or down when you get a new vehicle.

Monthly Spending Plan

1.Complete Column 1 based on your current situation. Start with your monthly take-home pay. This is the amount you have left after taxes and other deductions have been made.

 

Subtract the amount you need for savings, monthly expenses and monthly creditor payments.

The remaining balance is the maximum amount you can afford to put toward the monthly payment for a vehicle and any new related expenses, like car insurance.

2.Complete Column 2 based on your new situation. This column will show your new vehicle payment and adjustments  you’ve made to expenses and credit obligations. Be sure to adjust any expenses, like vehicle maintenance and insurance expenses, which might go up or down when you get a new vehicle.

The remaining balance in Column 2 will indicate whether you can afford the new vehicle payment and change in expenses projected.

 

Shop for the Best Deal When Financing a Vehicle

Take the time to know and understand all of the terms, conditions and costs to finance a vehicle before you sign the contract. Review and compare the financing terms offered by more than one creditor.

Sample Comparison

This example will help you compare the difference in the monthly payment amount and the total payment amount for a 3-year and a 5-year credit transaction. Generally, longer terms mean lower monthly payments and higher finance charges. Make sure you have enough income available to make the monthly payment by reviewing your monthly spending plan. You’ll also need to factor in the cost of automobile insurance, which may vary depending upon the type of vehicle.

Should I Lease a Vehicle?

If you are considering leasing, there are several things to keep in mind. The monthly payments on a lease are usually lower than monthly finance payments on the same vehicle because you are paying for the vehicle’s expected depreciation during the lease term, plus a rent charge, taxes,  and fees. But at the end of a lease, you must return the vehicle unless the lease lets you buy it and you agree to the purchase costs and terms. To be sure the lease terms fit your situation: Consider the beginning, middle and end of lease costs. Compare different lease offers and terms, including mileage limits, and also consider how long you may want to keep the vehicle.

When you lease a vehicle, you have the right to use it for an agreed number of months and miles. At lease end, you may return the vehicle, pay any end-of-lease fees and charges, and “walk away.” You may buy the vehicle for the additional agreed-upon price if you have a purchase option, which is a typical provision in retail lease contracts. Keep in mind that in most cases, you will be responsible for an early termination charge if you end the lease early. That charge could be substantial. 

Another important consideration is the mileage limit – most standard leases are calculated basedon a specified number of miles you can drive,typically 15,000 or fewer per year. You can negotiate a higher mileage limit, but you will normally have an increased monthly payment since the vehicle’s depreciation will be greater during your lease term. If you exceed the mileage limit set in the lease agreement, you’ll probably have to pay additional charges when you return the vehicle.

When you lease, you are also responsible for excess wear and damage, and missing equipment. You must also service the vehicle in accordance with the manufacturer’s recommendations. Finally, you will have to maintain insurance that meets the leasing company’s standards. Be sure to find out the cost of this insurance.