Once you have decided you want to buy a new set of wheels, you suddenly have several options available. All of a sudden you are looking at specs, colours, wondering what the drive is like and so much more.
However, before you get ahead of yourself and start test driving a bunch of different cars, you need to work out how much you can afford to spend on a car. Working out what you can afford each month, will help you to narrow down your options and keep you out of too much debt.
Take Those Little Extras into Consideration
It’s easy to see the monthly cost of a car and decide that you can afford it, but you need to take into consideration those extras that can quickly add up. These can make an affordable car and unaffordable one.
The first cost is fuel and you need to estimate what your fuel costs are going to be.
It can be costly to service your car, especially if it is out of its warranty period. You need to get a few quotes from reputable companies, so you can make sure you are getting the best deal. Servicing your car through the dealership can be pricy.
Car insurance is another cost to take into consideration and the newer the car the more your premium will be. Shop around for insurance quotes and get the best deal you can.
When is it Too Much?
When calculating how much you can afford to spend on car repayments, a good rule to follow is 25% of your salary. When you add in the extras then you will be closer to 30% of your salary.
Use a Deposit
With a deposit, you might be able to pay off your car sooner or you will benefit from lower monthly repayments, which will make the vehicle more affordable.
Watch Out for Balloon Payments
A balloon payment may seem attractive if you have your heart set on a certain vehicle that is out of your price range. However, watch out for these. With a balloon payment, you agree to pay a lump sum at the end of the finance term. This will make your monthly repayments lower but at the end of the term, you will need to have that lump sum available to settle the car.
If you are not able to afford the balloon payment then you can refinance it, but then you will be paying for your car for a lot longer. You can trade-in the car, but you will still be responsible for the excess amount and this can cause further issues.
When looking for a car, have a budget in place and consider all of the expenses. If you are not able to afford a new car then take a look at pre-owned cars. You might just find your dream car and a more affordable cost.