When I decided to upgrade my 20-year-old Corolla, I wanted some guidance on how to figure out how much I could afford to spend on a used car upgrade. I didn’t find much advice that was helpful to me, so I’m sharing what I learned through experience.
First, look at your budget and see how much you can afford to spend monthly on financing. If you don’t have a budget, it would be very wise to start one before making a large purchase! A budget is simply a monthly list of all your income vs all your expenses so you can see how much cash you have to spare. Make sure the number you come up with is an amount you can actually afford every month. It’s a good idea to keep a budget over at least one year in order to see how your cash flow changes throughout the year.
Take into account that your financing will last for 3-6 years, but your income might not go up as much as all your expenses. To be safe, when you come up with a number, reduce it by 10-20% to account for unexpected expenses and increased cost of living. When deciding how many years to finance, allow yourself some buffer room. Finance for 4 years if your budget says you can afford to pay off the car in 3 years. Then pay more per month according to what you budgeted. If all goes well, you’ll pay off your loan early! But this way if something comes up, you have a built in safety net allowing you to pay less per month and still pay off your loan within the agreed time.
So now you have a total number representing what you can afford to spend on your car. Let’s say you came up with either $10k or $20k. Don’t go out looking at cars priced at $10k or $20k! First, subtract 10%-20% for after purchase expenses on the car – it is a used car after all. Issues that may come up requiring you to dish out more money could include tires, a maintenance check-point coming up based on mileage, general repairs, or just pimping your ride.
So now you are at $8k or $18k (on the cautious side). Don’t go out looking at cars priced at $8k or $18k just yet! The advertised price of cars does not include taxes, or the fees for registering your car with the DMV, or any other fees that the used car seller feels like adding. On that note, read up on what fees are reasonable and ask that unreasonable fees be removed. Take into account about 10-15% in taxes and fees (you can get a more accurate number by looking up your state taxes and the cost for registration at the DMV).
Now your car purchase price is around $7k or $16k! Here’s where there’s actually some good news. The advertised prices at dealerships and used car lots are way jacked up. You can often talk them down 10-20% and you should definitely try to, otherwise they are just robbing you blind! (Private sellers may be different.) Look at trade-in averages to give you a range on what the seller probably got for the car. Figure that they probably low-balled their trade-in price, then factor in a decent profit for the seller, then make your offer. Set a cap on what you are willing to pay and walk away if they won’t price the car within your budget.
Willingness to walk away is the hard part! The sellers do everything they can to make you fall in love with the car so you leave with it that day at a higher price than you had intended. If you can bring someone level-headed with you to help you stay firm on your budget, that’s a good plan. Calculate before you go what kind of bind you’d be in if you spent more than you intended. Maybe you could get by with financing an extra $1k, but $3k would squeeze you uncomfortably tight. Now you know before you go whether or not you really could pay a bit more for that awesome car you just saw and now can’t live without!
If you can establish your financing before you even start to car shop, you’ll be in a better position. Car sellers make a lot of money off of financing, so if they tell you they can save you money, you better believe they have their own interests in mind, not yours! Also, there’s almost never 0% financing – those deals usually come with monthly fees that are essentially the same as an interest rate.
Finally, you may think I’m being alarmist or overly cautious. This is the plan I followed when purchasing my used car. I took 20% out for after cost repairs, I took out about 10% for taxes and fees. I calculated a range of what I could actually pay – my preferred price and how far I could stretch that for a great car find. In the end, even with all those deductions, I ended up spending my max amount! Fortunately, due to all this thinking ahead, the amount I spent was an amount I could afford!
This is off-topic for my blog, but I wanted to share this valuable info! 🙂