Driving a new car can be an exciting opportunity to test out new technology, reduce your gas costs, and maybe even add some nice luxury features to your life. The investment in a new car can be a long-term benefit if you make a wise financial decision with it. One of the key ways to do that is to ask yourself this. “How much car can I afford?” Then, examine how a new car and a new loan could fit into your monthly budget.
Whether your old car is too expensive to repair or you’re just ready for something new, there are a few things to keep in mind before you choose a car or a way to purchase it. How much can I afford for a car? Let’s examine a few factors that could play a role in this.
Assessing Your Financial Situation
If you’re working to rebuild your credit or you are considering your first vehicle, this is a good starting point. Your primary goal should be to determine if you have the room in your monthly budget to cover the cost of a car payment. To know that, you’ll need to assess your financial situation, including your income, expenses, and debt-to-income ratio.
Determining Your Monthly Income
When looking for a car you can afford, the first step is understanding your monthly income. Be sure to look back over your finances from the last few months to get a clear and accurate average income for the month. Look at all sources of income, including your employment, any side gigs you may do, or supplemental income you receive. Don’t overestimate. Rather, be as accurate as possible.
Calculating Your Monthly Expenses
How much car payment can I afford? The second part of answering that question is to know how much money you are already paying for your other expenses. Calculate all of your monthly expenses, including looking at fixed and variable costs. To do this, look through your bank statements, credit card statements, and cash withdrawals. Put each expense into a category, such as “rent” or “food purchases.” Do this for one month at a time, but try to calculate this information over a period of a few months.
That allows you to know what all of your costs are each month, on average. You can then make better decisions about whether you have enough in your budget to cover the additional cost of a monthly car payment.
Analyzing Your Debt-to-Income Ratio
With your income and expenses, it’s now possible to calculate your debt-to-income ratio, which simply is a factor that looks at what percentage of your income each month goes to pay your expenses. Every lender sets their own goals for eligibility, which means that when you approach a lender and ask, “How much car payment can I afford?”. They are going to look at these factors first.
To determine your debt-to-income ratio:
Add up your income. Divide that by the amount of debt you have each month. The lower this figure is, the better. Most lenders want to see it under 50%.
Deciding on a Comfortable Monthly Payment
Now that you have an idea of how much money you have that you can put towards your car payment, ask yourself a different question. “How much car can you afford?” In short, you need to know how much you feel comfortable spending each month on a car loan. If you are approved for a $500 payment but you would feel better with a loan that offers a $300 payment, that’s something to speak to the lender about.
Calculating Your Loan Affordability
How much of a car payment can I afford – based on affordability? To answer this question, you’ll need to consider just how affordable a loan is based on the cost to you, not just monthly but overall.
Considering the Length of the Loan
The loan term is the length of the loan. The longer the loan term is, the lower your monthly payment will be. However, the longer you carry a loan, the more time there is for interest to build up, and that means you’re spending more to buy a car.
Ideally, you want to choose a loan that is as short as possible but still affordable to you. You should feel comfortable with that payment, but make sure it’s not so long that you have to pay a great deal of interest.
Determining the Interest Rate
Interest rate is the fee for borrowing money to buy a car. The lowest possible interest rate is best. Your credit score is one of the most important factors impacting interest rates. Those with a high credit score are considered a safer investment to lenders, and they offer lower rates to them.
To get a higher credit score:
- Make all payments on time every month
- Keep the amount of debt you have under 30% of the available credit line
- Use credit, but try to pay off as much as possible each month
Factoring in Down Payment and Trade-In Value
If you have a trade-in, make sure you’re getting the best offer for it. That can help you as it counts as a part of your down payment.
Using an Auto Loan Calculator
If you’re still asking, “How big of a car loan can I get?” consider the use of an online auto loan calculator. This is a simple-to-use tool in which you can put in some basic information and learn about the likely monthly payment. You can do this without submitting any personal information, which means you’re not tied to a loan.
Typically, you will need to provide some basic information, like the amount of the car’s purchase price, the interest rate available to you, and the down payment you plan to make. You can then use the calculator to compare loan terms a bit to find what works best for you.
Improve Your Loan Eligibility
As you are considering how much of a loan you can afford, consider a few tips to help you get the best possible eligibility for a loan and the best terms available:
- Work to improve your credit score as much as possible in the months leading up to your purchase of a new car.
- Be reasonable about what you’re buying. The more expensive the car is, the harder it can be to qualify for a loan.
Shop around for an auto loan and ask how you can get a lower lower rate.
Enhance Your Credit Score
Your credit score plays a big role in how much of a loan you can obtain. Consider these strategies to help you improve your credit score:
- Use a credit card to make purchases each month but pay it off in full each month.
- Check your credit report to make sure the information is accurate.
- Avoid opening more than one line of credit over a period of several months.
- Ask existing lenders to increase your credit limit, which may help improve your credit-to-debt ratio.
- Always make your payments on time. That’s the most important factor in keeping your credit score high.
Pay Off Existing Debts
Work to pay off the existing debts you have. That helps to lower your monthly expenses and opens up your ability to qualify for a new loan. Pay off debts by making the largest payment you can towards them each month.
Save for a Larger Down Payment
Work to save up for a larger down payment in any way you can, including working a second job or cutting back on recreational purchases. A bigger down payment helps to lower your need to borrow and keeps interest rates lower.
Tips for Finding an Affordable Auto Loan
- Don’t settle for the first loan offer you get. Ask for a better deal.
- Talk to your bank or credit union about available loans.
- Consider longer terms if that can help make the monthly payment more affordable to you.
Shop Around for the Best Loan Offers
Look at loan offers from several lenders. You can do this rather easily online. It allows you to compare a variety of factors to find the loans best suited for your needs. You can use online tools to help you compare loans, but what’s most important is determining what you qualify for.
Negotiate the Loan Terms
You can negotiate with some lenders for lower interest rates or lower down payment requirements. The key is to ask for them and be sure to show that you have a steady income and employment.
Read the Fine Print and Ask Questions
When you have a loan offer, be sure to read the fine print. Make sure that you understand the terms and, if necessary, ask. That includes interest rates, the length of the loan, fines and fees, and qualification.
Without a doubt, when you are asking, “How much can I get approved for a car loan for?” you’re ready to buy a car. Do some homework so you can make a reasonable and informed decision about the loans available to you.
Your Ideal Auto Loan with Island Federal
Island Federal Credit Union can help you. Take a few minutes to explore the loan offers we have, and be sure to use our loan calculators and expert advice to help you get the best loan possible. Reach out to us for personalized assistance on your auto loan journey.