How to Calculate Your Car Budget the Right Way
While cars are certainly more affordable than they used to be, you may not have realized that their actual value depreciates as soon as you drive them off the lot. As such, it’s important to make sure that you consider several factors when calculating your car budget to avoid overspending and taking on too much debt.
1. Decide How Much You Can Afford
Calculate how much you make in a year by multiplying your annual salary by 12. Next, subtract taxes, student loan payments, and any recurring bills that you may pay monthly. The remainder is how much you can afford to spend on a vehicle payment each month.
2. Estimate the Value of Your Trade-In
To determine a reasonable trade-in value, you’ll need to research market values for similar cars currently being sold in your area. Kelley Blue Book, Edmunds, and NADAguides are excellent resources for researching trade-in values by year, make, and model. Once you have an idea of what a fair price is for your vehicle, consult with a local dealer or private seller about selling your car before you decide on buying another one.
3. Determine How Much You Can Put Down Monthly
To determine how much you can put down, figure out what is leftover in your monthly income after paying for essentials. Divide that by four and then subtract 20% of that amount – that’s how much you should be putting into a car each month if financing.
4. Negotiate Any Fees Or Sales Tax
When you finance a vehicle, you’ll usually be charged fees and sales tax by either you or your bank. According to Lantern by SoFi, these are negotiable and can typically be lowered (or removed) if you ask.
5. Calculate Annual Expenses (Registration, Taxes, Insurance)
The money you will need to pay annually for ownership of a vehicle. These costs include depreciation, registration, taxes, and insurance. Be sure to keep in mind what your responsibilities are so that you can get an accurate estimate of how much you’ll be paying for insurance.
6. Take Advantage of Financing Incentives
Many automakers are offering cashback and low-interest rates in lieu of leases, which can cost you thousands of dollars. So if possible, pay a little more than the sticker price and pay cash. Better yet, buy a used car: they’re cheaper and tend to hold their value over time. And if you have good credit, refinancing an auto loan with Lantern by SoFi could save you money on interest payments – and help you get behind the wheel faster!
7. Don’t Forget About Maintenance Costs
One of your biggest expenses will be maintenance. Figure out how much maintenance you can expect for a new and used vehicle. You should also figure out how much it costs to maintain a two-year-old model.
8. Loan Modification Options
If you have difficulty making payments, it may be worthwhile to try negotiating with your lender. In many cases, if you can’t make payments on time due to extenuating circumstances, lenders will work with you. The easiest way to refinance an auto loan is to find out what type of product your existing lender offers and inquire about it.
How to Decide Your Budget
When determining how much you should spend on a vehicle, there are three main factors to consider: what you can afford, what you need, and where you want to end up. Are you paying for your new car with cash or financing? The more money upfront, the less interest you’ll pay over time.
There are many things to think about before you can buy a new vehicle. Make sure you do all of your research and take your time figuring out what kind of vehicle is right for you.
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