Auto Loan: What can you comfortably afford?
Determining how much you can afford to pay is the most important step when considering a car purchase and applying for a car loan. In general, you should not spend more than 20 percent of your take-home pay (the amount on your paycheck, not your original salary) on all of your household's vehicles -- that means your car, your spouse's car and that old convertible tucked under the tarp in the garage. The exception to this standard might be a graduate just coming out of college who is living rent-free with family or friends but does have a steady, if entry-level, salary [source: Booth Hubbard].
Now before you start having visions of a fully loaded luxury SUV, keep in mind that a lot factors in to the 20 percent rule beyond the purchase price of your car. You need to consider how much money you can put down, the loan's interest rate and other factors. All of this adds up to the true cost of ownership, which includes:
- Depreciation: Cars are a depreciating asset; they lose value as they age.
- Interest rate: This is the annual interest fee applied to your loan.
- Insurance premiums: Find out how much your insurance will cost. Different types of cars may have higher insurance premiums than others do, especially if repair costs tend to be higher.
- Fuel: Consider which grade of fuel your vehicle requires. How far will you be driving each week? How much gas will you need?
- Taxes and fees: You'll be paying sales tax and fees to register your car with the state as well as annual property taxes.
- Maintenance: Maintenance on vehicles varies, and there is not a tried-and-true way to gauge these costs -- but keep in mind things like oil changes and new tires.
- Repairs: Repairs might not be an issue for new cars, but over time and with pre-owned cars, repairs will have to be factored in to your budget.
- Federal tax credits: Are there any government incentives available for purchasing a certain type of car?
All of these calculations and factors may seem daunting, and no doubt there is math involved. However, there are lots of tools online, including payment calculators.
If you've used one of those calculators and you're ready to go shopping, don't go just yet; you can still do a bit more homework to streamline the process.