Buying a car can be like jumping into a lake. Without some planning and research into what you might encounter, you could be in too deep before you know it. But if you take the car buying process one step at a time and put some time into researching your purchase and your finances, the process is likely to go a lot more smoothly.
Before you begin shopping for a car, it’s important to take a look at your budget and figure out how much you can afford to spend on a vehicle. Can you afford $200 a month for your new vehicle? What about $300? That number will be the total amount that you can pay for the car itself and operating expenses, like fuel and maintenance.
Operating expenses can be about a third to a half of the monthly cost of a new car. So take the amount you’ve decided you can spend on your car each month and multiply it by .66. That is the most you should consider spending on monthly payments for the vehicle to be able to afford operating expenses as well.
You’re also going to need money for a deposit. How much? The bigger the better. To get a loan for a car, and often for a lease, you’ll probably need to have a deposit of around 10% of the total price of the vehicle. The larger your deposit, the smaller your monthly payment will be and the less you will pay in total for the car in the long run. But make sure you don’t cripple yourself or reduce your savings account by putting down a deposit that is too big.
For help anticipating your car loan payment or determining how much you can afford to spend, use our financial calculators here.
Just because you’ve figured out what you can afford, it doesn’t mean lenders will agree. That’s where your credit worthiness comes in. Lenders decide how much you can borrow by looking at your credit history and ability to repay or meet the repayments. It’s nothing personal. They don’t care what you look like or what you think about the status of your personal finances. They only care about the numbers that appear on your application.
The credit history will tell them your credit worthiness (how well have you paid past debts?), financial means (do you have enough income to repay a loan?) and debt load (do you have too much debt to be able to take on more?).
Many lenders will pre-approve a certain loan amount based on your income, ability to repay and credit history. You’ll know exactly how much you can borrow for a car and be able to use your pre-approval amount as a bargaining chip with car dealerships.