Buying a car: What is the maximum price you can invest?

Buying a car at the right price is a complex process. Between the price they sell it for, what it costs, the various incentives, discounts, etc., it's hard to know what a car is really worth.

First of all, there is the price posted by the dealer.

Then you can compare on the internet in each dealership.

If you negotiate well, you can get a nice discount from the dealer.

Unfortunately, the path from the list price to the floor price is often shrouded in mystery. And if you're not careful, you can end up paying more than a car is actually worth - or paying more than you can afford to buy a car.

But the price isn't the only way car dealerships can cost you money. Not only do they make negotiating the price a strange and stressful experience, but they're also very good at convincing you that their new cars are worth exorbitant amounts of money.

Remember that in 2021, the average loan for a new car was well over 20,000 dollars. And the average payment for a new car was $370 per month - for 60 months!

Considering that the median household income was only $22,040 in 2019, these numbers are absurd.

Four steps to help you determine what monthly payment you can afford to buy a car.

Whether you like it or not, it's up to you to determine how much you can actually afford to spend on a car. Either way, don't leave it up to your salesperson to decide how much you can borrow.

Why not? Because, according to his data, your credit and income can buy just about anything as a vehicle.

What you can afford to spend is never dictated by the credit agencies or the big banks. Ultimately, only you know how much you can afford to spend on your car and other bills.

So how do you determine how much you can afford to buy a car?

Step 1: Determine your monthly income

If you're not already budgeting, you may not know exactly how much you earn each month. This step is crucial before you can decide on your monthly car payment.

Pull out your pay stubs and add up your regular income for an average month. If you get paid the same amount every month, this part is easy. But if your income fluctuates, you may need to estimate your average income based on several months of pay.

Step 2: Subtract your expenses

Once you have an idea of your income, you also need to add up all your monthly expenses. How do you typically spend your money? Be sure to add up all your fixed expenses (rent, insurance, TV, phone, internet, etc.) and estimate your variable expenses (electric bills, gas, food, etc.).

Finally, you should also plan for savings in your monthly budget. If you don't save every month, you should, right?

Once you've tallied up your monthly expenses and savings goals, compare your income to your expenses. How much money do you have left over each month?

Step 3: Estimate gas and insurance costs

Will the price of insurance and gas go up or down when you buy a newer car? If you anticipate any changes, be sure to add them to the budget you created in steps 1 and 2.

Here's a good example:

Let's say you earn a monthly take-home pay of $2,000.

Here's what your expenses look like once you add them up:

Rent: 700

Food: 300

Internet: 40

Gas: 50

Car insurance: 40

Water, electricity, gas: 150

Miscellaneous taxes: 75

Childcare: 300

Savings: 200

Total: $1,855

In this scenario, you should have about €145 left to spend on a car each month. This is the amount you could spend, but not necessarily the amount you should spend.

Step 4: Use a car credit calculator

Once you have an idea of your monthly income and expenses, you can find out more by using a credit calculator, like this one.

Enter your desired loan amount. From there, you can see what your monthly payment might be.

Change the credit term settings as well.

Let's say you're looking at a Peugeot 3008 that's currently on sale at a local dealer. The asking price is $10,000, but you're hoping to drive it for $9,000.

By playing with a loan calculator, you can experiment with different scenarios.

If you borrow $9,000 at an annual interest rate of 2.99% and pay off the car over 60 months, for example, your monthly payment will be $161.

Or, you may have saved up and have a $3,000 down payment and want to pay off your loan over four years rather than five. If you borrow $10,000 over four years at the same rate, you will owe $132 per month.

5 important tips for buying a new or used car

While the above paragraphs help determine how much you can afford to buy a car, it doesn't mean that this number has to become what you will spend. If you want to have fewer constraints on your monthly expenses, you should strive to spend less on a car than you can afford to spend.

Here are some tips that can help:

#1: Don't forget the extra costs

In addition to the price of your new vehicle, you will have to pay for the registration and insurance.

When it comes to vehicle registration and insurance, don't forget that there are different parameters that go into the price. It changes depending on where you live, where you park, where you work, etc...

#2: Leave some leeway in your monthly budget

If you have established a monthly budget using the above paragraphs, you probably know how much you can afford to pay for a car. However, don't forget to leave plenty of room in your budget.

As life goes on, unexpected expenses can arise. The appliances in your home may break down, and your car may need repair. You may have unexpected bills or lose your job. The more "extra cash" you have in your budget, the better off you'll be.

#3: Compare the one expense you can control - car insurance

While you can't control the price of your new vehicle's registration, you can shop around for the best auto insurance rates. The price of your car insurance can vary by hundreds of dollars depending on the insurer you choose. By comparing prices and deductibles, you can make sure you get the best deal possible.

#4: Buy used rather than new

According to Autoplus, new cars depreciate by up to 20% as soon as you drive them off the lot, and they continue to depreciate rapidly until they're worth almost nothing. While the same can be said for used cars, you can at least avoid the initial decline that occurs in the first few years.

Keep in mind that car loans are based on more than just the purchase price of a new or used vehicle. In addition to the principal payments on your loan, you will also pay interest.

While new cars tend to be sold at higher prices and lower interest rates, older cars are sold at lower prices (on average) and higher rates.

#5: Stick to your budget

This last tip may seem obvious, but it is extremely important. If you've taken the trouble to set a limit on how much you can spend on a car, make sure you stick to it!

A smart car salesman will do everything he can to get you to buy a newer model or spend more money. Why? Because his income depends on it!

By setting limits in advance, you can ensure that you stay in control.

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