How Much Can I Afford For A Car?

When we want to buy a car the first thing we should ask ourselves is, How much should I spend on a car? Most of us will finance or lease a car which means that we’re driving cars we can’t really afford but making the payments thinking that we can. This means that if we had to pay $50,000 for the car outright, most of us couldn’t. Cars in all honesty are not the greatest investment because cars constantly go down in value but it makes our lives easier so how much should we spend on a car?

Whether you have a home that is paid off or you few monthly bills, the basic rule is we should not be spending more than 20% percent of our monthly income. You need to include all car payments in your household. You should also keep in mind that the amount that you can spend on a car should depend on more than just the purchase price. You need to factor in the cost of insurance, gas and maintenance.

First you need to consider your debt ratio. This is the percentage of debt to assets you own. You will take your total debt and divide that number by your total assets. The lower the number the better. Next calculation will be the car price to equity ratio. This is where you take the final price of the car and divide it by the total number of assets you have in the bank again the lower the number the better. If the number is too high, then you are buying too much car. The final calculation is interest and principal. Every car loan comes with interest. The key to this is to make sure you can afford your monthly payments. Let’s say that you purchase a car for $25K and got an interest rate of 5%. You would multiply .05 x 25,000 and the total of $1,250 is roughly the amount of interest you will pay annually. Your combined principal payments plus your interest payment should not be more than 20% of your monthly net income.

If you are buying a new car, it is important that you pay off all short-term credit card debt. If you have more debt than assets in the bank then you should consider buying a used car if you must have a car at all. Visit Prudent Value Cars at www.prudentvaluecars.com where our vehicles are top quality, pre-owned cars and trucks with low kilometres. We offer flexible financing for all kinds of credit and zero down for qualified customers.