A car is useful – only if you can pay for it. With this, it is crucial that you know how much car you can afford before you arrange car financing or negotiating with car dealerships. Your goal here is to keep your car purchase from breaking your monthly budget.
If you are buying out of necessity, you should know the rules of spending on a car. To make things easier for you, here are the rules:
The 10% Rule
The 10% Rule is referred to as the “frugal rule”. This will work for drivers that only need a car to get from point A to point B. The rule states that you should only put 10% of your annual salary for the car. For instance, if your annual salary is $50,000, this means you should only spend $5,000 on your car.
The 36% Rule
The 36% Rule indicates that your total loan payments should not take more than 36% of your annual salary. For instance, if you make $75,000 annually, total loan payments should not exceed $2,250 every month.
The key here is to look at your current debts. If your current debts already take up 36% of your salary, it will not improve your situation if you buy a car. The only option here is to save more so you can have a decent down payment. If you have a decent down payment, you are looking at inexpensive monthly payments.
The 20/4/10 Rule
The standard rule is 20/4/10. This means you have to put down 20% on a car then finance it for not longer than 4 years. Moreover, you need to ensure that you keep your payment less than or equal to 10% of your monthly income – this should include the interest and monthly insurance expenses.
Keep in mind that these rules apply whether you consider cars online or not. You need to include factors like mortgage, medical expenses, debts, food, and utilities when deciding the ideal rule. To help you further, here are other tips you can consider when buying a car:
- Compare dealerships: keep in mind that your car-buying experience will vary depending on the dealership. If you want a satisfactory experience, you should pick the right dealership. You can compare by reading the reviews – preferably the Better Business Bureau rating. Ideally, you have to pick a dealership with a good rating.
- Decide on financing: while there is nothing wrong with settling used car finance, you should find other financing options from different institutions to help you find better deals.
- Prepare to negotiate: if the dealership does not provide you with a favorable deal, you should stay away. If the dealer wants your business, they will eventually meet your requirements or expectations.
Bottom Line
When it comes to determining how much to spend on a car, the answer is simple – as little as you can. In the end, you have to make sure that your expectations align with your budget and how much money you have. Remember that the car will lose half of its value in just four years.
