Calculating Your Car Budget

Is the car that gets your pulse racing within your budget? Probably? Not too sure? Stop. Right. There. It’s time to get the calculator out. Read on for tips on calculating your car budget!

What’s the Total Price of the Vehicle?

The price on the sticker isn’t the only factor to consider. Include the sales tax, title and registration fees, and extended warranty. Don’t forget car insurance – shopping around will help you get the best deal. (If you need some help when it comes to choosing the right car insurance for your requirements, head over to Car Insurance for Beginners: What Does It All Mean?)

Pro Tip: If you already have a particular vehicle in mind, do a little research into its fuel efficiency so you’re prepared for gas bills.

Car Budget Calculation Tips

Meet the Mechanic – Your New Best Friend

When it comes to parts and ongoing maintenance, some cars cost more than others. If your budget is tight, it’s a good idea to look for cars that can be inexpensively repaired. If you’re likely to buy a vehicle that requires maintenance, be sure you can comfortably afford not just the repairs you know will need made, but also unforeseen ones.

Pro Tip: Bring along a mechanic to the test drive to give the car a thorough inspection.


The Golden Rule On Calculating Your Car Budget

If you plan to make monthly payments, budget around 20% of your salary. But, if your budget is tight or if you know additional expenses are coming up soon, we recommend that you set your sights on cars that are closer to 10% of your income.

The same holds true if you’re planning to buy the car outright. Calculate 20% of your annual salary, and this will give you an idea of a sensible amount to allocate towards your car budget.

Pro Tip: If you can, wait until interest rates are lower. Then, you’ll be able to afford the payments on a more expensive car.

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Take Debt into Account

The 10% to 20% guideline might not be helpful if you’re already allocating a substantial percentage of your monthly salary towards the payment of existing debts. Experts advise spending no more than 36% of your income on debt payments. Add your debts (mortgage, car loans, student loan repayment, credit cards, store cards) and subtract them from 36% of your income.

For example: if your income is $4,000 per month and you are paying $1,200 on debt payments, you can afford a monthly car payment of $240. This is substantially less than the $400 to $800 suggested by the 10% to 20% guideline.

Our calculation: ($4,000 x 0.36) – $1,200 = $240

Pro Tip: If you are in a position to pay off credit cards that are near their credit limit, try to do so. This will lower your utilization rate and help you achieve a better credit score, which will result in a lower interest rate for your car loan.


That All-Important Down Payment

You should aim to have at least 10% of the car’s sale price (closer to 20% if you’re buying a new vehicle). When it comes to down payments, the more you can put down at the time of purchase, the lower your monthly payments will be.

Pro Tip: If your credit score is poor, the interest rate for your loan will be higher. A larger down payment will help keep those monthly payments as low as possible.

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If you’re interested in learning more about car financing, there’s lots more information in our post How to Organize Car Financing (Whatever Your Circumstances).

Any questions? Get in contact with the team via email or real time chat via our website.

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