Buying a new car can be fun, frightening, exciting and a whole host of other emotions. Sometimes, we get caught up in the moment and end up in a car that could be impractical for our needs, too much money for us to spend or both. Before shopping for a car, it is important to determine how much we can spend.
Determine Your Spending Limit
Figure out how much you personally can spend each month on a car payment, if you are getting a car loan. The bank may qualify you for more than this amount, but the bank doesn't know how much you spend on food, whether or not you have a hobby you love that you spend money on or how much traveling you do for your daughter's soccer games. You need to come up with a monthly amount that you can spend without breaking your budget. Experts say that your monthly debt-to-income ratio (not including mortgage) should be no more than 20 percent. You can add up all of your debts and see where you fall. If you are already over that percentage, it may be wiser for you to save up and pay for a car with cash.
The bank or finance company will determine your debt-to-income ratio. This does not include your rent, food, utilities or those types of expenses. This is how much you owe in debt compared with how much you take in each month. While this will tell the bank about your debt, it doesn't help you if you have extensive bills in other areas.
Add up all of your monthly bills and include money for savings in the equation. Find out for what amount the bank will approve you. Let them know what monthly price range you are looking at and only look at those cars--do not be tempted otherwise.
Remember you will be paying for tax, title and registration, in addition to the car itself (often these things are rolled into the loan). You will also have the additional expenses of gas, insurance and maintenance on a new (or new to you) car. Be sure your monthly budget can handle these additional expenses.
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