How much can you really afford to spend on a car?
How do you determine the price range of a car you can afford? A rule of thumb is that your monthly car payment should not exceed 18 percent of your monthly net income. If you own two vehicles and make payments on both, the total still should not exceed 18 percent of your monthly net income.
Begin by calculating your monthly net income (your "take-home pay") and subtracting all of your
expenses. Your car payment must come from the money that is left after subtracting other expenses.
Remember that the cost of car ownership also includes insurance, registration fees and maintenance. Be sure to account for planned savings and any other upcoming payments you may have (home purchase, etc.) and try not to exceed the 18% rule of thumb.
Once you know a monthly payment you can comfortably afford you can determine:
- How big of a down payment you must make to purchase the vehicle you want
- The appropriate price range to shop for a vehicle
Knowing these three numbers is important. They will help ensure you buy a car you can afford.
Credit union Lending Staff can help you determine the size of loan for which you qualify, based upon your desired loan payment.
Financing your Vehicle
If you are like most people, you will look for financing to purchase your vehicle. You should ask your credit union for a “pre-approved” auto loan before visiting any dealership. Why? Dealerships use financing as a huge profit-center. The credit union is only interested in saving you money and making the purchase easier on you.
Financing at the Dealership
When you apply for a loan through a dealership, they review your credit history and share it with many lenders. Your credit history determines the interest rate that you will pay. More importantly, dealerships can add interest “points” to your loan. This means, you may qualify for a 4.9% interest rate but end up paying 6.9%. The difference is profit for the dealership.
Financing at your Credit Union
When you apply for a loan at a credit union, you generally receive a much lower interest rate than what is offered through dealerships or other lending institutions. In addition, while your credit history and term of the loan determine the interest rate, there is nothing added to that rate. All members are treated the same and there is no risk that someone will arbitrarily charge you a higher rate than your qualifying rate. Additionally, for the last four years the credit union has returned at least 10% of the interest you pay on your loan back to you in the form of a Shared Earnings Dividend, distributed once a year. This makes the effective rate you pay on your loan even lower. This is just one way that your credit union patronage is rewarded.