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Optimal Budget for a New Car

In the excitement of shopping for a new car, many people forget about a very important thing - budgeting!

It's amazing how few take the time to actually figure out what they can comfortably afford.

Most of the time, car buyers have their heart set on a certain model, they get to the dealership and once they add all the options and extras, they realize the price has crept up much higher than they expected.

Add car insurance, taxes, and other dealer fees on top of this, and you can easily see how someone can get in over their heads. This leads to situations where one has to finance more car than they can comfortably handle, and ultimately end up struggling to make car payments.

The Optimal Budget

If you don't want to worry about buying more car than you can afford, here are the optimal budget guidelines that most experts recommend:

  1. Monthly car payment should be no more than 15% of your gross pay or 20% of your take-home pay.
  2. Down payment should be at least 20% of purchase price
  3. Maximum term of a car loan should be 48 months

For example, if your gross monthly income is $5,000, then your maximum monthly car payment should be no more than $750.

On a 48 month loan at 6% interest, this will allow you to finance around $32,000. Add to this a 20% down payment of $6,500, and your total maximum budget for a new car will be $38,500.

If you have a stable job and have no problems paying bills on time, then this optimal budget will ensure that you'll be able to make your car payments without much problem.

3 Steps Every Car Buyer Needs to Take to Save Maximum Money

The key to getting the best deal is to gather price or lease bids from as many local dealers as possible. Then shop that best price around until no one can beat it. Here are the steps:

Step 1 Get Prices From My Trusted Network

Select the vehicle you're interested in to see if there are local dealers in my network who will provide you with their best upfront price. You will get direct access to an internet sales manager who you can further negotiate with online (no need to visit dealership).
Select Vehicle to Get Local Pricing

Step 2 Get Prices From TrueCar / CarsDirect

TrueCar, and CarsDirect are my top 2 online price quote recommendations. These services show you pre-negotiated prices from dealers closest to you - and the deals are usually pretty decent. But remember, you can still negotiate further.

Step 3 Complete my Checklist

Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan

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About The Author

Gregg Fidan Gregg Fidan is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.
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