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Auto Finance: Budgeting for your New Auto Payments

Buying a new auto can be one of the most expensive purchases you will ever make. Outside of buying a home, a new auto can become one of the largest expenses related to your monthly budget. Yet, many people rush into the auto buying process without taking the time to determine what they can truly afford in terms of new auto loan payments.

In case this is your first time buying a new auto, auto loan payments are the amount of money that you will owe once a month in order to pay off the auto loan that you take out to buy your new auto. Ensuring your monthly auto payments are affordable is why it is so important to pay attention to the total cost of the auto you buy, interest rates you are offered when you apply for a auto loan, and your loan terms.

Your Down Payment (including a Trade-In)

The first thing that you should do when determining the auto loan and the monthly loan payments that you can really afford on your current income, is deciding on the amount of cash that you have to put down on the auto as a down payment. This is usually one to five thousand dollars that you can put down right away to lower the principal amount of the auto loan that you’ll have to finance. The more you can spare for a down payment, the better, because it will usually decrease the interest that you pay in your loan payments. In addition, most lenders will require some type of down payment to reduce their risk, and show your financial responsibility. If you have a vehicle to trade in when purchasing a new auto, you should also add the market value of your trade to the amount of your down payment.

Monthly Income Considerations

Once you determine your down payment amount and the value you will get if you have a trade-in, the next thing that you have to do is determine what amount of your monthly income is available to be put towards regular auto loan payments. Realistically, you shouldn’t have to allocate more than twenty percent of your monthly income to monthly auto payments. If your prospective auto will cost you more than twenty percent of your income each month, it is probably not the right auto for you and your budget.

Interest and Auto Loan Duration

Accounting for the interest you are likely to get on a auto loan from the dealer or the bank of your choosing, you should multiply the dollar amount that you’ve determined represents your monthly auto payments by thirty six, forty eight or sixty months. These are the common lengths for a auto loan on a new or used auto. The total amount that you arrive at represents your ideal amount for a auto loan. If you don’t like doing the math yourself, you can use an online auto loan calculator or auto payments calculator.

When setting your budget for your new auto make sure you remember to account for the tax and tag fees associated with your new auto purchase. So once you set your total budget for how much you want to spend, you should look for a auto with a MSRP that is 10% less than your budget amount, so you can afford taxes and fees.