“So, what kind of payment are you after?” is typically among the initial questions car dealership salespeople ask. The way you answer that question should be based upon one thing — and one thing only.
Your monthly budget.
It’s really easy to get caught up in the moment and push yourself beyond your financial comfort zone when you’re buying a car. It’s important to ask, “Can you really afford that car?” — and have done the necessary research to know for sure.
Here’s what you need to do.
Check Your Credit Score
If you’re like most people, you will need a loan to cover the cost of the car. Loans come with interest payments, which in turn are predicated upon your perceived creditworthiness. Your credit score, in turn, establishes this.
Car manufacturers sometimes offer financing rates as low as zero percent to shoppers with a strong credit score. On the other hand, the lower your score, the higher your interest rate will be, which makes your monthly payments higher.
So, the first step to determining whether you can afford a car is determining how much you’ll pay for the money you’ll borrow to get it.
Review Your Budget
You might already know what your budget will support if you’re already making a car payment. However, if this is your first car loan, you’re going to need to define how much of your income will be available to cover the expenses that come along with car ownership.
Keep in mind you’ll also need to have enough cash on hand to deal with all of your other expenses, and save for your future needs. Further, there’s more to consider than just the loan payment when it comes to owning a car. You’ll have to cover insurance, fuel, parking, tolls, maintenance and your annual registration costs as well.
Run the Numbers
Once you’ve reviewed your budget and settled upon a figure you’re confident will work, consult a good auto loan calculator to see how much car that amount will get. You’ll be asked to input the interest rate for which you’ll likely qualify, the amount of the down payment you can make and the number of months over which you’d like to repay the loan.
And oh, by the way, you’re trying to buy a car that costs more than your income will support if you have to push a loan term beyond 60 months to get a monthly payment to fit into your budget. Bear in mind, the longer the loan term, the higher the overall price of the car. Each additional month introduces another interest payment into the transaction.
Getting pre-approved for a car loan is a rather simple process with all of the above information in hand. Having done so, you’ll already have a financing package in place for an amount you can handle with ease. This helps you avoid looking at cars outside of your price range. It also gives you a nice bargaining chip when you’re negotiating your purchase.
Car dealers sell financing in addition to parts and maintenance services. With a loan offer already in hand, you’ll put them in competition with the lender that’s already willing to back you. Best case, the dealer will offer you a lower rate to go with their financing. Worst case, you’ll already have a great financing deal in hand.
Asking whether you can really afford that car before you go shopping is the best way to avoid having to compromise other aspects of your finances to compensate for a mistake.
It also makes owning your new car more of a pleasure.