A new car is one of the larger purchases you’ll make, so you will no doubt want to ensure you’re only spending what you can afford. That’s why it’s important to sort out your finances before you go out looking for a new car. Whether you plan to buy it outright, lease or opt for a financing deal, here’s how to make a budget.
Get an idea of prices
The average price of a new car is just over $35,000, but this number will vary a lot depending on whether you go for a hatchback, SUV, convertible or truck and how many extra features you add. It’s worth thinking about the sort of car you want and then looking at some prices online to get a rough idea of how much you’ll want to spend. For example, you can look at the new Ford car range on their website and get a good idea of the average price range.
Decide how to finance your car
Many people automatically opt to lease or finance their car through the dealership, but it’s important to explore all your financial options to get the best deal. Buying a car with cash is often the cheapest option in the long-term, although it’s rare to do so. If you have the money in your savings ready to spend and can afford to buy your car upfront, then you have an excellent negotiating tool to get discounts and save on interest payments. This means there will be no expensive car payments coming out of your account each month.
While lots of dealers offer financing and leasing schemes that seem very good value, it’s important to read the small print. While you may get a low monthly rate for a certain number of months, you may find there’s a balloon payment at the end of the loan term, which can run to several thousand dollars. As well as making car payments, you’ll need to save each month so you can pay this off. Be sure to bear this in mind when you are writing your budget.
Decide what you can afford each month
If you decide to finance your car, you should ensure:
- You aren’t spending more than 20% of your take-home pay on car payments
- You can afford a down payment of at least 20%
- You don’t take a car loan longer than 48 months – realistically, anything longer than this won’t be worth it.
Take a loan that’s a higher percentage of your income and you’re likely to stretch your budget too far, and while a car loan of more than 48 months will mean lower payments, it also means you’ll pay back larger amounts of interest, making it poor value for money.
When you’ve decided to buy a new car, it’s important to do your research and decide exactly what you want, both in terms of the car features and finance. This will put you in a better negotiating position once you get to the dealership and means you can get the best possible deal for your money.