First-time car buyers in the market for a new ride might not have any idea how much to spend. When you’re in the early stages of shopping, it’s good to have some knowledge on your side. Knowing what you can afford before you start to look will help narrow down choices when it comes time to test drive and ultimately negotiate for a deal on a vehicle that is right for you and your family needs.
When money matters aren’t hard to figure out, there are two main influences – income and debt – that impact how much somebody should plan to spend on their first set of wheels. Many people think of their credit score as a number that should be as high as possible. But it’s often the case where you have to keep one eye on your credit score and another looking ahead at what could happen if potential lenders or insurers find out about negative aspects of your past spending habits, such as defaults, arrears, missed payments and court judgments.
First-time car buyers typically use three main sources for financing – banks, credit unions and online lenders. By applying for a loan from each source before you start looking at vehicles will give you an idea of what rates and terms are available for which types of cars. It can also reveal how lenders view your credit history (though don’t be discouraged by any red flags; not all lending institutions share the same criteria). Determining your monthly payment goals is the next step.
Picking out a car you can afford is key. Remember, your first vehicle doesn’t have to be your dream car. But it should be in line with your income and financial responsibilities, such as monthly car payments and insurance.
The size of the loan you need to buy a new car will depend on the price of the car. Generally speaking, you should aim for a monthly payment that is no more than 20% of your gross monthly income, but some experts suggest limiting it to 15% or less. If you have a lower credit score, for example , you may have to get a loan with a higher interest rate, which would contribute to a higher monthly payment.
Once you know what kinds of loans are available, it’s time to consider your debt-to-income ratio . This calculates how much money you bring home every month, then divides that figure by your debt obligations to determine how much cash is left over before taxes. Keep in mind that car payments will be made each month but many other expenses can come due at any time, which means variances throughout the year. There are calculators online to help estimate this number for you; however, it’s best if you do some research yourself so you have an idea of what others are using as a benchmark for shopping around.
Establishing limits on spending based on income and debts helps to focus the car-shopping process. Knowing how much you can afford before you shop will help narrow down your vehicle choices and serve as a good foundation for negotiating prices and terms with dealerships.
