How Much to Budget for a Monthly Car Payment

The key to budgeting for a car payment is knowing how much you can afford.
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Ready to ditch your college clunker for a set of wheels more reflective of the successful professional you’ve become? Fortunately, finding the right car isn’t nearly as difficult as finding the perfect pair of jeans, but before heading to the dealership, you should factor your new ride into your budget to determine how much you can afford.

What You Can Afford

The simplest way to determine how much to budget for a car is to figure out how much you can comfortably afford to spend each month on a car payment. If you maintain a personal budget already, you know what your disposable income is. If not, you need to deduct your recurring monthly expenses – all those bills as well as living expenses such as groceries – from your monthly income after taxes. The remaining amount is your disposable income. Then you need to decide how much of that you can reasonably part with each month for a new car. Liz Pulliam Weston of MSN Money recommends spending no more than 10 percent of take-home income each month for a car payment. Make sure you have enough left for fun stuff, emergencies and of course, your savings account. You don’t want the new car to be your only enjoyment.

Added Expenses

In addition to taking on a monthly car payment, there are several other expenses to work into your budget, most importantly – insurance. Different factors will influence how much you pay for insurance, including your age, where you live, how many drivers are in your household, existing driving record and the type of car you get. The more expensive the car, the more it will cost to insure it. Other things, such as how susceptible the car is to break-ins may also increase the cost of insurance. Once you have a car in mind, get quotes from different insurance companies to get an idea of how much you’ll need. Gas is another essential expense. Check how many miles per gallon your dream car gets and the cost of gas at your local station to see what it will cost to keep your new car fueled. For an even more precise figure, use MapQuest to determine the mileage of your work commute and other typical errands. Square away a little more for upkeep and maintenance items such as oil changes and car washes.

Future Forecast

A car loan is typically a five year commitment and while you may not have a crystal ball, you should do a little budget forecasting to ensure that your new car payment will fit into your budget for the duration of the loan. You may be able to afford a $400 car payment now, but if your rent increases in the next year, will you still be able to? Consider whether you might want to buy a house, new furniture or anything else that might impact your monthly recurring expenses.

Shopping Around

Once you have crunched all the numbers and found a car that meets your personal style and fits perfectly into your price range, shop around to find the best deal. Down payments and interest rates will significantly influence the negotiation process. Used cars loans typically come with higher interest rates and of course the bigger your down payment, the less you will have to finance. Most dealerships have the flexibility to adjust these numbers to strike a deal. If you’re not happy with the dealership’s interest rates but still want the car, check with your bank to see if they offer car loans at lower rates. Stick to the amount that you know you can reasonably afford and be prepared to walk away from a dealership if they aren’t willing to negotiate. Exercise patience and don’t let anyone talk you into something you know you can’t afford.

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