That new car smell can be more intoxicating than anything your local purveyor of distilled spirits has in stock. Suitably “ethered” by it, you can be talked into spending way more than you should just to keep that fragrance in your life.
Thing is, the aroma fades long before the bills stop showing up each month.
This is why using a car loan calculator to protect your budget is the smart play, long before you ever set one foot into a car dealer’s showroom. Doing so will help you narrow your search to models you can comfortably afford. This way you’ll have a car you still enjoy long after the bouquet has evaporated.
Here’s what you need to know.
What You Should Spend on a New Car
Most financial experts recommend limiting your spending on a new car to 35 percent of your annual income — before taxes. In other words, your cap should be around $35,000 if your pre-tax salary is $100,000 a year.
I’m willing to bet that’s a lot less than you thought it’d be. However, you also have to keep in mind you’ll pay a monthly insurance premium, buy fuel, cover taxes and registration fees and eventual maintenance costs as well.
Here, it’s important to note you have to keep your other bills in mind too. You’ve got rent or a mortgage payment to make. You have to eat, heat your home and pay for utilities— as well as other services too. Each of those items takes a slice off of your annual income, even before we start talking about taxes.
Your Credit Scores
Another key affordability aspect of a new car purchase is your credit score. After all, this is the primary driver of the interest rate you’ll pay a lender to finance your deal. The higher your score, the lower your rate.
However, you’ll need to make sure your credit reports are accurate before you check your credit score. Mistakes happen all the time that can cause negative items to appear. These, in turn, can make your score lower than it should be. You can get free review copies of all three of your credit reports (one each from Experian, Equifax and TransUnion) at AnnualCreditReort.com.
Satisfied your reports are accurate, you can purchase your credit scores from each of the agencies and use them to see what interest rate you can expect to encounter.
How to Use a Car Loan Calculator
You’re probably already aware of what you can afford if you currently have a car for which you’re paying each month. In this instance, all you need to do is plug in your monthly payment along with the interest rate for which you’ll qualify, along with the value of your trade-in (if any) and the amount you have to offer as a down payment.
On the other hand, you’re going to need to figure out what you can afford to put toward a car payment each month if this is your first time buying a car. This, you can do by subtracting the amount of your monthly expenses from your monthly income to see how much is left over. You’ll also need to subtract savings, investments and entertainment spending.Then you can plug the appropriate numbers into a car loan calculator to see what you can get. Using a car loan calculator before shopping will spare you the disappointment of discovering you’ve fallen in love with a car too pricey for your budget.