NEW YORK, NY / ACCESSWIRE / November 15, 2024 / Determining affordability for a car purchase involves more than just being able to make the monthly payments. That's certainly part of it, but if you use a personal loan to buy a car, you need to consider the terms, the annual percentage rate (APR) on financing, and the down payment amount that's needed. In this article, we'll explain how to calculate how much money you need to purchase a car.

Step 1: Review Your Budget

You should always review your budget before making any significant purchases. Make a list of all your monthly expenses and measure them against your monthly income. Make sure you include everything. Leave some cushion for miscellaneous costs also. This can prevent you from missing monthly payments due to financial "surprises" not budgeted for, like medical expenses or home repairs.

Adding up the numbers is just the beginning. The review part is determining which expenses can be reduced or eliminated. Start with unnecessary expenses like cable TV packages and frequent dining out or takeout food. This can help you create additional spending bandwidth that can be used to buy a new or used car. The goal here is to know exactly what you can afford.

Step 2: Add Up the Costs

The sticker price of the car is only one part of the total cost of a vehicle. You'll also need to pay for insurance, maintenance, fuel, and repairs if a vehicle warranty doesn't cover them. Experienced car owners have a good idea of what these costs will be. First-time car buyers might not. Call around and do some online research to calculate total costs.

Another cost to look at here is the total cost of the loan you take out to buy the car. Taking out a longer-term loan with a smaller monthly payment can be easier on your budget, but you'll end up paying more for the car because you're paying more in interest. Opting for a 48-month rather than a 60-month loan could cut several hundred dollars off the total cost.

Step 3: Set a Target Price

You can set a target price for a car by looking at what your budget can handle and what the additional costs of a car will be, over and above the sticker price. For instance, if your budget can handle $500 a month and the vehicle's costs will be $200, you should be able to afford a monthly loan payment of $300. Set your target price based on that.

If you have a car to trade in, you can cut your total costs by subtracting the trade-in value, or you can upgrade to a nicer vehicle and perhaps keep costs the same. This is up to you. You may also have the option to refinance certain car loans, which may alter the total cost later on by updating your terms and interest rate to help you save money. Knowing what your refinancing options are could save you some money.

The Bottom Line

There are three steps to figuring out how much money you need to buy a car. The first is determining how much you can afford by reviewing your budget. The second step is calculating the total cost of a vehicle, including insurance, maintenance, fuel, repairs, and finance costs. The third is to set a target price based on the first two steps.

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Sonakshi Murze
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sonakshi.murze@iquanti.com

SOURCE: OneMain Financial