Article courtesy of GreenPath(TM), a partner of ECU, offering ECU members free and confidential financial wellness counselors and resources.
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How Much Can You Afford to Pay for a Car?
No article can tell you how much you can afford. But there are a few things to keep in mind before you buy your next vehicle. Your first step is to create a good and thorough budget. Many experts say that your total transportation expenses should not exceed 20%-25% of your monthly net income. For example, for someone making $2,500 per month (after taxes), that equates to about $625 per month for total transportation expenses. Broken down, that could look like:
- Vehicle payment - $450
- Gasoline - $100 ($25 per week)
- Insurance - $80 per month ($960 annually)
- Maintenance - quarterly oil changes at $30 each
When many people buy a car, they typically only consider the monthly car payment that the dealer or finance company estimates. We've got a free Car Loan Calculator that will help you figure out different loans and price ranges that can meet your budget requirements. Other items to consider for your transportation costs are:
- What will the new insurance costs be for the car?
- Do you have to make a down payment or can you trade in your old vehicle?
- What about annual license plate fees?
- How is the car rated on reliability? What is the chance that you’ll have to make repairs every year?
- And your new car will most likely have different gas mileage. Will your fuel costs increase or decrease?
Add all of the monthly costs and then you will see your total transportation costs. And remember, just because the dealer may offer you a lower monthly payment doesn’t mean that it’s a better deal. Your payment may be lower because they offered you a loan with a longer term. These loans can have even higher interest rates so you’ll pay a lot more in the long run.