Buying a car is an exciting experience, especially if it's something you've been saving for. However, this purchase is a big one, so it's important to know how to budget for a vehicle and what you should plan to spend overall. There are several factors you should take into account when setting a budget for your vehicle purchase. 

Assess the Total Cost

Budgeting For New Car

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Before you set a budget, it's important to consider all the details that go into owning a vehicle long-term. Not only do you have to make the monthly payments, which will depend on the value of the vehicle you select, but you also have to pay for insurance, license and registration fees, fuel, and maintenance. When setting the amount you can afford, you need to make sure you can pay for all of the components that go into vehicle ownership.

The cost to keep your car registered depends on the state in which you live, while fuel costs tend to go up and down. Your insurance rate will also depend on your age and driving record as well as the vehicle you choose. More expensive cars cost more to insure, while drivers with clean driving records tend to qualify for lower rates. When you purchase a car, you'll also have to add sales tax and any associated fees, which can add 10% or more to the total price.

Consider the Rule of Thumb

According to financial experts, a good rule of thumb is not to spend more than 15% of your net income on a new car. This means that if you bring home $3,500 per month, you should stick to a budget of $525 or less for your vehicle and associated insurance, fuel, and maintenance costs. Another way to budget is to make sure you're spending no more than 35% of your net income on all your debt payments. If you have other debts, such as a mortgage or student loans, the amount you can spend on car costs may go down.

Establish an Overall Budget

As mentioned, it's best to stick to a budget of 35% of your net income or less on debt payments. You can also take time to create an overall budget that determines where every dollar you earn will go. The recommended budget is 50-30-20, which means 50% of your income is spent on needs, 30% on wants, and 20% on savings. Your needs include food, housing, and transportation, which is the cost of your vehicle, while your wants may include travel, entertainment, and other items that aren't essential to your survival. The other 20% is to save for the future.

A car is a necessity, especially when you live in an area that doesn't have reliable public transportation. When establishing your monthly budget, you can include the cost of a vehicle in your essential category, but you need to make sure you also have plenty of money left over for the other essentials. If you want a more expensive car, you could set aside a portion of the 30% you designate for wants.

Save a Down Payment

Now that you have a number in mind for what you can afford to spend on your vehicle, you can start planning your down payment. When financing a vehicle, you should plan to put at least 20% of the total cost down, as this helps you have more equity in the car. Equity refers to the difference between the value of the car and how much you owe on it.

Since a vehicle is a purchase that takes a big hit in depreciation when you drive it, a loan on your vehicle can cause you to be upside down as soon as you drive off the lot. By putting a portion of the cost down at the time of the purchase, you will have more equity. A down payment also helps reduce the amount of your monthly payment, helping you stick more closely to your budget.

Saving for a down payment usually requires you to make some sacrifices. Perhaps you could brown bag your lunch for a while and set aside the money you'd typically spend eating out. You may also want to look for monthly costs you could trim, such as video streaming services or memberships that you don't actively use. Any money you can save for a down payment will help lower the monthly payment on your new car.

Compare Loan Term and Interest Options

It's also smart to compare loan term and interest options, as these factors will impact the total overall cost of the vehicle. When you have a high credit score, you can qualify for a lower interest rate. However, if you've struggled with your finances in the past, you may want to do some work on your credit before applying for a car loan. Even an increase by a few points can get you into a higher credit bracket and help you qualify for a lower rate.

Some auto lenders are offering long-term loans that help buyers get lower monthly payments, but it's smart to look at the payment schedule to see just how much you'll end up paying for the car. A $15,000 car can quickly end up costing you nearly double or even more when you stretch out the loan over seven years or longer.  

Consider a Lease

Another way to get behind the wheel of the car you want without spending as much every month is by entering into a lease agreement. By leasing your vehicle, you may be able to get a lower monthly payment and not have to save as much for a down payment. At the end of the lease term, you can either purchase the car for a previously agreed-upon price or choose another vehicle and enter into a new lease agreement.

At Hiley Subaru of Fort Worth, we can help you qualify for the new vehicle you've dreamed of owning. We have an extensive selection in stock ready for you to test drive. Our helpful financial assistance professionals are also available to assist with financing, so check out our financing application to get started.

Categories: Finance

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