A Budget For Your Auto Purchase
For many consumers, the purchase of a new or used auto will be one of the most expensive purchases during their lifetime, and ongoing monthly expenses (financing, insurance, maintenance, etc.) will be a significant portion of their monthly budget. Consider all the costs associated with a auto to help find the right one that you can afford.
Setting a Maximum Budget
First, you should take a look at your annual and monthly finances to determine how much money you have available to purchase your auto, and the associated monthly expenses. Assuming you will be financing your auto in some way that involves monthly payments (either with a auto loan or auto lease), you should be able to identify a maximum monthly payment that you can afford. A good rule of thumb is never to exceed 20% of your total net monthly income (after taxes). So for example, if you're net monthly income is $2,000; your monthly auto payment should not exceed $400 per month.
Keep in mind you also need to pay for your auto insurance during the course of the year, your monthly gas expenses, any proactive maintenance (i.e. washes, oil changes, scheduled servicing), auto roadside assistance (i.e. AAA), and you should save for a rainy day in case you need to cover future repairs. When in doubt, you should try to keep your monthly auto payment budget as low as possible.
How Much You Can Put Down in Cash + Your Trade In
Once you identify a monthly payment that you can comfortably afford, you should determine how much cash you have available to put down, right now, on your auto purchase. It's always good to put as much money down up front as you can when you are using a auto loan, to reduce the amount of money you need to borrow and thus the interest you will pay over time.
Along with any cash you have to put down, now is the time to determine if you plan to sell a existing vehicle (and apply that cash to your new purchase), or if you plan to trade-in your existing vehicle at the dealership. You can use our Used Auto Values section to estimate how much money you can get from selling or trading in your auto.
How You are Financing Your Auto Purchase and the Interest Rate
At this stage, you should also be considering what type of financing options are available to you. As we recommend here on AutoBuying101.com, that process should include obtaining your Credit Score & Report, and understanding your Auto Finance options. Using the information you find in those sections, your target monthly budget, and the amount you can put down + any trade-in credit you get; you can now use our Auto Budget Calculator. You should use a few different scenarios to see the impacts associated with changing the inputs in the calculator so you are comfortable identifying how much you can afford.
You will also notice on our calculators that the cost of tax, title, and registration should be included in your total purchase budget. These fees are in addition to the purchase price of the auto, so remember when you are discussing price with a auto dealer or private party seller, the total "out the door" or "final" price will be higher than the agreed upon purchase price (once you add in the tax, title, and registration fees).. You should contact your local DMV or ask a auto dealer for the specific tax, title, and registration fees in your local area.
Researching Autos That You Can Afford
Now that you have obtained all of this information and used our auto calculators to understand all the variables and costs associated with a auto purchase, you should take the financial amount that you think you can spend on a new or used auto and use our Research Autos section to find autos that are a) within your price range, and b) meet the other criteria you are looking for (style, features, mpg, etc.).
In order to protect yourself, it is very important to determine how much you can afford. Keep in mind the additional fees (tax, title, and registration) above and beyond the negotiated purchase price, and don't get sold into a auto that is too expensive for you.