Are You Really Capable of Buying a New Car?

Are You Really Capable of Buying a New Car?

If your car is giving you a hard time or you’re just bored and in the mood for change, the thought of buying a new car will probably take over your entire thinking. Just imagining a brand new, shiny car with seats covered in plastic and the smell of the never-been-touched and never-been-used interior is enough to make anyone’s heart race. But is buying a new car the logical thing to do?

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There are so many variables that need to be considered when spending a large sum of money. You’ll find the majority of people around you advising against it because of how fast the value of cars tend to depreciate. Cars are not to be looked at as an investment, but quite the opposite. The question is; Can you really afford buying a new car? Here are some factors to consider to help you make the right decision:

How to calculate the car budget you can afford?

The first thing you should do is list down the value of all the expenses you incur during the month. Rent/mortgage, household expenses, tuition fees for yourself or your kids, and just about anything from grocery shopping to the cost of a drink at the end of the day.

The next step would be to deduct that amount from your net monthly income just so you have an idea of what budget you’re looking at and whether it’s an expense worth incurring.

When it comes to financing a car, there’s a simple rule to go by: The 20-4-10 rule which we will tell you all about it in the coming lines.

Pay a 20% down payment

When thinking of the best way to finance for a new car, it is recommended to have at least 20% of the value of the whole car paid upfront. Most banks won’t typically require a down payment, but you should pay it anyway to help reduce the value of the monthly installments.

Adjust loan term to 4 years

Before you apply for a loan, you should definitely check your credit score. You can use Freescore360.com to check your credit score fast and accordingly try to increase your score by paying bills on time. The majority of banks will give you the option of paying back your loan over a 60-72 months’ time frame, but it is wise to adjust that loan term to be within 4 years. 

Even though you might be paying more in monthly installments, the interest rate is decreased resulting in a lower cost paid for the car in the long run. This way, you won’t still be paying off your loan when the car has depreciated a great deal and end up losing money when you want to go for a trade-in.

Use 10% of your income for monthly car payments

According to the rule, the budget you should be spending on car installments per month should not exceed 10% of your total monthly net income. While it sounds like a ridiculously low amount, there’s a valid reason behind this rate that many people seem to overlook. The 10% will not be the only expenses you’ll be paying, but there will be another 7-10% of costs to be factored in, such as cost of fuel, car insurance, and even speeding tickets.

If you’re putting more than 20% of your monthly income towards buying a car, you’d have to compromise a great deal and cut corners elsewhere making it an unreasonable expense.

While this rule is the most commonly applied, it is also important to factor in your marital status and income. If, for instance, you’re single and getting a high salary, then getting the wheels of your dreams is definitely worth it since you don’t have urgent responsibilities to attend to. 

But, if you’ve just taken out a mortgage on your home or expecting twins, then maybe sticking within the budget above and buying a lower-end priced car or even a used one would be a wiser decision to make. Just don’t forget to check your credit score and make sure a new car won’t break your bank.