Figure out what you can afford to spend on a car
So what’s the car of your dreams? Is it the shiny new black-on-black Cadillac Escalade on 24s, the new silver Mercedes Benz S550 AMG edition, the totally clean metallic-blue special edition Ford Mustang, or maybe you’re really dreaming and thinking about that sweet, cherry-red 612 Ferrari Scaglietti? What the heck… it’s a dream, right?
Unfortunately, reality says that most of us can’t afford the car of our dreams. Because of this, before you even think about what type of car you want, you need to determine what price range is affordable for you. If you don’t, you’re probably heading for a letdown. So, how do you figure out what you really can afford to spend on a car? Well… to determine your price range, there are two things you need to know first:
- How much can you afford as a down payment?
That is, what amount of money can you put down, upfront in cash, or with a trade-in, or with both cash and a trade-in combined?
- What monthly payment amount will work for you?
That is, when financing an automobile, what is the maximum payment you can afford every month; and, what is a more reasonable payment that is comfortable for you?
What about the down payment?
As noted above, the down payment is money that you put down, upfront, to reduce the total amount of a car loan. The lower your down payment, the more you will have to finance and the higher your payment will be. Conversely, the more you can afford to put down, the less you will have to finance and the lower your payment will be.
Finding an auto loan that requires a low down payment is relatively easy. In fact, with approved credit, you can often get a “zero-down” deal. However, to minimize your overall cost for the loan, it is often ideal to put down as much as you can afford – with at least 20% to 25% of the loan amount being preferable. As was noted above, a larger the down payment equates to less money you need to borrow. This, in turn, lowers your monthly payments and reduces the amount of interest you will end up paying over the life of the loan.
It is important to note that a down payment isn’t necessarily cash out of your pocket. If you have a car that you plan to replace, you can turn it in for trade-in allowance with your dealership. This allowance can be credited toward your down payment on your auto loan. Or, if you do not want to trade-in your car with a dealership, you can sell it yourself. You will generally get more money out of selling your car yourself than you would trading it in with a dealership.