■ By Richard Perry / Contributed
Greetings from the Hemet Car Guy!
If you are budgeting for your family, business or even as a chairperson for a non-profit you should first determine what you can actually afford before you spend.
As my grandma always said, “Live within your means.” So you ask: what does that mean in relation to a car? A lot actually.
If you’re considering leasing or financing a vehicle, you should understand the total costs involved. That’s because the total amount you can spend is made up of a variety of factors such as: the approved loan amount, cash down payment, and trade-in amount. Consider the following when calculating your budget.
Keep in mind the total cost of your vehicle includes sales tax, title and registration fees, and possibly extended warranty fees. When buying a new car, give yourself some flexibility in your budget. Other costs beyond what you pay at the dealership can add up as well. Future obligations like car insurance, repairs, and warranties are also apart of the total investment of the vehicle.
Your monthly payment will include both principal and interest and will be calculated based on the length of your loan term. If you can wait to make your purchase until interest rates are lower, than you can afford a more expensive vehicle or save money on your payments.
The more you put down on the initial purchase of your vehicle, the lower the payment will be. Typically, you want to put at least 10 percent down. It doesn’t make sense to pay interest on tax and license.
The 10–20 Percent Rule
Banks typically like to keep your payment at 15 percent of your income. If you’re frugal you may want to spend about 10 percent of your income towards your vehicle. This means that if you make $4,000 per month, you’ll want to devote $400 per month towards monthly payments for all of your vehicles. Most people actually spend around 20 percent after interest, warranties, and car maintenance.
Even if you are paying cash, you’ll want to take 20 percent of your annual income to determine what you can afford to spend on a vehicle.
Bank always look at your debt ratio when they see your application. They typically follow the 36 percent rule. The rule is to spend no more than 36 percent of your gross monthly income on debt. Figure out what all of your monthly debt payments are, including mortgage, credit cards, and loans. Once you’ve totaled those, subtract them from 36 percent of your income to determine how much you can realistically add. For instance, if your income is $3,000 per month and you already spend $800 per month on credit card and loan payments, you can only afford a $280 payment.
Hope this helps – happy driving!
Richard Perry is The Hemet Car Guy and owner of VIP Autos in Hemet. For more information, visit www.hemetcarguy.info