You arrive at the dealership and cast your eyes over an expanse of shiny, new vehicles. Each one with a different yellow number plastered against the windshield. Your pockets bulge with stacks of hard-earned cash that you’ve set aside for just this very moment.
But how do you know how much to spend?
If you’ve ever asked yourself, “How much should I spend on a car?” you’re not alone. Everyone seems to have their own opinions on what’s best. But in this guide, we’ll show you how to calculate the cost you can afford and drive off in your dream car.
Assess Your Finances
First things first, you will need to assess your finances. How much do you make after taxes each month? Are you sticking to a budget, or do you need to make one?
If you don’t budget, start. It’s the best way to know where your money is going. It’s also the only way to determine how much you can realistically put towards a car.
The Rules of the Roadster
There are a few things to keep in mind when looking to buy a car. First, it’s that the suggested amount you should pay for a car in full is 35% of your yearly salary. For some, that may be far too much.
In addition to that, experts suggest you should only put 20% of a car’s total cost on the downpayment. It’s not uncommon to take out a loan to help cover that cost. Just be sure you are including loan repayments in your budget.
Finally, you should expect to spend 10-15% of your monthly income on car payments.
Now, these are just suggestions. You can definitely spend more than that. But you should probably try to spend less.
How Much Should I Spend on a Car?
The short answer is as little as possible.
Try to spend the least amount of money you can on your new car (without buying a lemon). Why? Because the vehicle will lose value as soon as you drive it home.
So try to procure a low monthly car payment. That doesn’t mean you should have a 70-month term, though. Look for cars where a 36-month lease will offer you a repayment amount that fits your budget.
So don’t break the bank on a new (or used car). Be smart and do your research ahead of time. Forward-thinking, budgeting, and planning can save you hundreds, if not thousands of dollars.
Buying New vs. Used
Depending on your income, you may be able to buy a car new. It’s good to review the pros and cons of buying new vs. buying used. But here’s what you need to know in terms of cost.
The median cost of a new car in Canada is over $40,000. As was said earlier, a downpayment is around 20% of the total cost of the vehicle. So you should expect to put down $8,000 at the lot.
From there, monthly payments could be anywhere from $530 to over $800. It all depends on the length of your repayment term.
So, buying a new car isn’t impossible if you’re in the $50-55,000 salary range. But it is probably not your most frugal option.
Remember: the amount of your monthly take-home pay to contribute toward a car payment is 10-15%. If you make $52,500 a year, a monthly payment of $530 would be well above your suggested limit.
You can find a used car, however, for much lower prices. Consider what you bring home each month. Then calculate 10-15% of that to know how high of a monthly payment you could make.
Multiply that number by 36 to get a sense of what a minimum repayment term might add up to. For example, let’s say that 10% of your monthly income is $300 after taxes. If you put that toward your car, you will pay off $10,800 after 36 months.
Now add about 20%, or $2,160, of that as a downpayment. That tells you that you can afford a car that’s around $13,000.Take this information with you to the dealership and stay firm at your price point.
Budget Before You Buy
It’s good practice to budget as far in advance as possible before you buy another vehicle. If you have a car already, think about how long you can drive it before you need to trade it in or sell it. Give yourself time to save.
Save for as Many Payments as Possible
One great way to start budgeting for your next car is by putting away car payments each month. This works well if you do not already have a car or are not making payments on one already. Set aside some money now, and you’ll have your first few payments covered.
Start Putting Away for Repairs
It’s also important to start budgeting for repairs before you bring your car home. If possible, build up a little nest egg of funds for any bumps that may come down the road.
It also helps you get in the habit of putting away money for repairs anyway. And that’s a great way to keep yourself out of a financial bind.
Expect Additional Fees
After all of that, you’ll need to also put away money each month towards car insurance. There may also be contract fees included at the dealership that you’ll want to be prepared for.
How Do I Pay for My Car?
If you are unable to budget ahead of time, that’s okay. Make sure you start putting away money for the above payments as soon as you bring your new car home. You can also use online loans to help buffer some of the upfront payments.
Research Makes and Models
Now that you’ve assessed your finances and made your budget, research cars in your price range. You can do this online or inquire at your local dealership ahead of time. Try to be realistic and limit your options to what you know you could afford.
Use a Budget Calculator
Use a car budget calculator to see what costs you can afford clearly and all in one place. Budget calculators let you plug in your income, loan amounts, and monthly costs. Then they come up with numbers that accurately reflect what you could pay for a car.
They’re available on websites and apps.
Ready to Hit the Road
Hopefully, you’re no longer asking yourself, “How much should I spend on a car?” You understand your finances, budget, and the makes and models you can look for–you’re all set!
Get ready to take on the dealership! And if you need a loan for your downpayment, don’t hesitate to get in touch.