Test driving a Porsche on a Hyundai budget sets you up for disappointment once you crunch the numbers. When you're ready for a new ride, making a realistic budget before you head to the dealership helps you target your search. Unless you want to live on ramen noodles and move back in with your parents, your car price range should fit comfortably into your current budget. The wide price range available for new cars gives you more opportunities to find a vehicle with the features you want at a price you can afford.
Calculate how much money is available as a down payment on the vehicle. Making a down payment lowers your monthly loan costs, plus you'll end up paying less interest over the course of the loan, saving you money long-term.
Estimate the value of any vehicles you plan to trade in for the new car. Use the Kelley Blue Book value for trade-ins to get a rough estimate of what you might receive from the dealership for your old vehicle. Another option is to sell the vehicle yourself and use the cash you receive toward the down payment.
Review your budget to determine what is available each month for a car payment. Include the amount you currently spend on your car payment as well as any additional money in the budget that could comfortably go toward the car payment. A general rule of thumb is to keep all of your debt payments to 36 percent or less of your gross income.
Consider how long you want to finance the vehicle; usually between three and six years. Stretching out the financing for a longer term means lower payments, but you'll pay more interest and might find yourself upside down on the loan. This means you could owe a lot more than the vehicle is worth, which becomes a problem if you want to sell or trade in the vehicle before it's paid off.
Figure in the cost of the vehicle's title, tax and license, which is added onto the purchase price. This can add 10 percent or more to the cost.
Call your insurance company when you narrow down the options to a few vehicles. Ask for a quote for the insurance premium for each model to get an idea of how much to budget for insurance.
Total the amount comfortably available in the budget for the car payment--including the cost of insurance--to determine an affordable monthly payment for the car loan. The interest rate of the loan also affects how much you can afford. Getting preapproved from your own lender gives you a more accurate estimate of the interest you'll pay and the total amount you can finance while staying within the monthly limit.
Add the amount of your down payment--less the title, tax and license amount--to the amount you can comfortably borrow to figure out the purchase price that will fit into your budget.
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