You’ve decided it’s time to purchase a new or used vehicle. Now it’s time to figure out how much you can afford.
Make sure you have a realistic budget before shopping for an auto loan. If you have a realistic budget, you have a better chance of ending up with a loan you can afford and pay on time. You will also be more likely to account for ongoing costs, such as vehicle maintenance and insurance. You will want to be sure that your budget will support both the loan and the other costs of ownership. If you are having trouble coming up with a budget that works for you, think about ways that you can reduce the cost of your auto loan, such as: Saving for a larger down payment… Buying a less expensive vehicle… And getting fewer features or options.
Determine how much loan you can you afford… Before you start the process of getting a loan, see how much you can afford. Make sure you have a realistic budget before shopping for an auto loan. The Federal Trade Commission’s “Make a Budget” worksheet is a good place to get started consumer.ftc.gov/articles/pdf-1020-make-budget-worksheet.pdf. For helpful information on making a budget visit consumer.gov/articles/1002-making-budget. While this consumer guide is focused on auto loans, you can also research what type of vehicle fits into your budget. There are numerous publications and websites that discuss features and prices. Consumer Reports, Edmunds, Kelley Blue Book, and NADA Guides are just a few examples. These sources may provide information on prices for specific models and options. The Federal Trade Commission (FTC) also provides helpful information on buying and owning an automobile at consumer.ftc.gov/topics/buying-owning-car.
Look beyond the monthly payment… Many people think about a loan in terms of the monthly payment. Be careful here. The total cost of the vehicle financing matters. If you lower the monthly payment by taking out a longer loan, you pay more in interest. A longer loan also puts you at risk for negative equity over a longer period of time, which is when you owe more on the vehicle than the vehicle is worth. To learn more about auto trade-ins and negative equity check out the Federal Trade Commission’s article at consumer.ftc.gov/articles/0257-auto-trade-ins-and-negative-equity.
Factor in all the costs of ownership… Remember to factor in the other costs of ownership, such as: Additional costs at the time of purchase (state taxes, title fees, and dealer fees). Ongoing costs throughout the time you own the vehicle (insurance, gas, annual registration fees, maintenance, and repairs)
Consider the resale value of your new vehicle… Another factor in your budgeting is the resale value of the vehicle that you are considering purchasing. A vehicle loses value over time. If you sell or trade in this vehicle in the future, the value of the vehicle and whether you have paid off the loan before you want to sell it or trade it in will be an important factor in what you can afford.
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