As a first-time buyer, how much car can you afford, and what's a responsible price target?
Related: More #FirstTimeBuyers Advice
Budgets are important, especially when you're buying a car. As with all things financial, of course, there's a debate over how much of money you should spend on your next car. Roughly 40 percent of consumers try to stick within 15 percent of their budget, according to CNW Research, while about half want to stay within just 5 percent of their budget. You should check with a financial planner to determine what's right for you; you don't want to become "car poor" because you don't have anything left for the month after making your car payment.
For the majority of shoppers, the budget hits home in the form of a monthly car payment. About 85 percent of new-car buyers today finance or lease their car, according to Experian Automotive. A majority of used-car shoppers do the same. So, how does that monthly payment turn into a new-car budget, and how much should it be? Start with some of our tips.
Know your expenses. Estimating how big your car payment is should depend on many factors: How much money is coming in, and how much of it is going out on rent, mortgage payments and/or student loan debt? Those are relatively entrenched costs, and they're harder to change than, say, deciding to eat out at restaurants less often or ditching your cable TV.
Expert estimates range broadly. Greg McBride, a senior financial analyst at Bankrate.com, advises that a car payment should equal no more than 15 percent of your pretax monthly pay. That means if you make $50,000 a year, your monthly car payment could be as much as $625.
But for many of us, it should be lower. The 15 percent ceiling applies only "if you don't have any other debt other than a mortgage," McBride cautioned. Not many first-time buyers can say that, so be smart about how much you're putting aside.
Remember, car payments aren't the only expense. You'll also have gas and insurance to pay for; don't be surprised by how tolls and parking expenses mount, or forget to have a regularly funded stash for maintenance and repairs. All of those expenses have led some experts to recommend even lower budget limits for your car purchase. Interest.com Managing Editor Mike Sante says you shouldn't spend more than 10 percent of your pretax income on the combined cost of car payments and auto insurance, while The College Board recommends 15 percent of take-home pay should go toward all transportation expenses.
Got an idea of a monthly car payment? Good. Now, pull up Cars.com's auto affordability calculator and fill in the monthly payment you've decided on. If you have a car you plan to trade in, estimate its value through Cars.com's Black Book calculator and fill it in along with your estimated down payment. McBride recommends having at least 10 percent down if you're financing a new car and 20 percent for a used car. Don't assume your trade-in will suffice as a down payment.
Enter a combined percentage for sales tax, which you can typically find on your state's Department of Motor Vehicles, Department of Revenue or other state government website. (A local dealership should be able to tell you that rate if you call.)
Now you're ready to think about the interest rates and terms for your car loan, assuming you're not paying cash. For the sake of this exercise, input a five-year loan (60 months) at the prevailing interest rate, which is about 3 percent as of February 2015, according to Bankrate.com.
Focus on the car's price, not the payment. Plug in all the numbers and you should have a pretax number for how much car you can afford. We'll cover the negotiation process in a separate #FirstTimeBuyers story, but if you did your homework with Cars.com's auto affordability calculator, you can now focus on making sure you find a car that fits that price. The monthly payments will work themselves out.
"The bigger picture is, how much are you paying for the car," McBride said. "Focus on getting the best price you can for the car, limiting those other out-of-pocket cost and add-on costs. And if you do all that, the monthly payment will [follow] — you'll have a manageable monthly payment."
Digital Vision/Photodisc/Thinkstock; Cars.com photo by Evan Sears
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