Car Finance: What Can You Afford?

Before making any major purchase, it is wise to create a budget. Buying a car is no exception. While you may dream of driving off the lot in a fancy ride, you must first ask yourself whether or not you can afford it.

Here are some things to consider that will help you determine what you can afford:

Getting an auto loan

If you’re budgeting for a car this likely means you will be using an auto loan to finance your new vehicle. In this case, you will need to consider your monthly payments. To know how much you will be able to spend on your car payments you will have to consider your other recurring expenses. How much do you spend each month on things such as rent or mortgage, groceries, utilities and other loans? These are obligations that you must meet each month; however, you might be able to adjust your spending on things such as entertainment and eating out, so that you will have more to dedicate to your monthly car payments. Still, your car payments should not exceed 10% of your earnings.

Total cost to own

You should also remember that the sticker price is not the only cost to consider in the equation to determine the affordability of a car. When purchasing a vehicle, you must also consider the down payment, tax, other fees and add-ons. After you have procured the vehicle, other expenses will include gas, upkeep, car insurance and yearly registration fees.

Your down payment

Regardless of the car you plan to buy, you should be able to make at least a 20% down payment. Why is this important? This will enable you to get a much better interest rate and will result in fewer loan payments over time. Also, if you ever need to refinance your vehicle or sell it, the process will be much easier as you own a greater share of the vehicle the more you contribute to your down payment.

The length of your car finance loan

It should be your aim to pay off your car finance loan within 4 years. The longer you stretch your payments, the higher your interest rate will be. You should also consider the matter of depreciation. It is said that a car loses approximately 10% of its value once you drive it off the lot. In its first year of ownership, it is estimated that the car’s value will decrease by another 10%. This depreciation will continue with each year that passes. After 4 years there will be a significant level of depreciation and you do not want to still be paying for your car finance as its value continues to decrease.

When you make the decision to a purchase a car, there is a lot to consider before you take an auto loan. However, if you remember the 20/4/10 rule —20% down, 4 years to pay, no more than 10% of your monthly earnings—then you should be able to buy a car without putting yourself in debt.

If you are looking to buy a car in British Columbia and you still have questions about just how much you can afford, come in and speak with a member of the Credit Now team and let us help you figure it out.

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