Optimal Budget for a New Car
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:
- Monthly car payment should be no more than 15% of your gross pay or 20% of your take-home pay.
- Down payment should be at least 20% of purchase price
- 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 MoneyThe 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 NetworkSelect 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).
Step 2 Get Prices From TrueCar / CarsDirectTrueCar, 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 ChecklistFollow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid