Besides buying a home and saving for retirement, your car buying decision is one of the bigger financial decisions you will make. Buy the wrong car and you could get buried in high monthly payments and expensive insurance. Or at the other end of the spectrum, you might cheap out too much and end up with an unreliable car that wastes your money on repairs and maintenance. Either way it could be a decision that you really end up regretting.
The problem is, how do you figure out how much you can truly afford to finance? Do you simply estimate how much money you can spare each month and multiple that by the number of months you would like to finance for? Unfortunately doing that would be ignoring one part of the equation – the interest charged by the financing company or bank. Unless you are lucky enough to score 0% financing, it is something you have to take into consideration.
To help with this calculation, I recommend you take advantage of a car finance calculator such as the one from The Car People. With such a calculator you can actually figure out what price of car you can afford based on your estimated monthly payment, length of financing and interest charged.
When you do these calculations beforehand you know ahead of time what kind of vehicle is truly within your price range. You won’t be suddenly overwhelmed when you fall in love with a car and later find out that the monthly payments will stretch your finances too far. You just know the car salesman and finance department will put the pressure on for you to go for it anyway.
The thing that you have to remember is that you shouldn’t just go for the most expensive vehicle that you think you can afford. I know I personally made that mistake. With an asset that quickly depreciates, you should instead be thinking about the cheapest car you would be satisfied with and try to buy used. The money saved would be much better put towards investing or a mortgage down-payment.
Of course I know some of you do prefer to buy your cars with cash, but that simply isn’t always an option for people. There are often times when you just suddenly need to replace your vehicle. Or some people may decide that they can get low enough financing rates that their money would be best used elsewhere.