WHAT CAN I AFFORD?
Before you head out to purchase a vehicle, it is important that you determine exactly what you can afford. When negotiating with either a private party or a dealer, you will need to be prepared to handle all kinds of high-pressure techniques. Your best line of defense is by far having already done your homework so you can stand your ground.
Taking into consideration that buying a used or new vehicle will probably be your second largest purchase after a home, you need to make sure you know exactly what your budget will support. Some basic questions you need to ask yourself are:
- What total purchase price can I afford?
- What amount of monthly payment can I afford?
- How much will I be required to put down?
By loading yourself up with knowledge and facts, the shopping experience can be much easier. After you have a good idea of what you can afford, add in some of the other costs associated with this purchase such as insurance, warranties, title, dealer fees and financing. Get the whole picture of the total cost before figuring if a vehicle is affordable within your budget.
Let’s be honest,. Dealers would like to sell you the most expensive vehicle you can afford but that probably is not the right choice. So how do you determine the price range that is best for you?
A good guideline to follow is that your monthly vehicle payment should never exceed 20% of your monthly NET income. Take your monthly net pay and first deduct all of your living expenses. The remaining money is what could be used toward a vehicle payment. Once you have determined what you can afford, you can quickly estimate what your monthly payment should be.
By knowing your approximate monthly payment, you will be able to shop only in the appropriate price range, and you will know if the person selling the vehicle is being reasonable or out of line.
As the sales person starts quoting you payments, you will be alerted if they might be adding in any hidden costs.
One thing that should be obvious but is often overlooked when buying a vehicle is the sales tax. Be sure to add this figure in so you do not have any unpleasant surprises. To determine what you will need to pay in sales tax, simply multiply the total cost of the vehicle by your state’s sales tax rate. So for example, if you had a vehicle with a total value of $20,000 and your state’s sales tax rate is 6.3, you would be paying a total of $21,260.
You also need to ask what the ‘dealer fee’ is for the vehicle. This ranges quite a bit between dealers and is a great way for the dealer to “pad in” extra profit. When getting a price quote, it is essential that you ask and know what this fee is.
Another good idea is to contact your local bank, credit union, or other financial sources to obtain a quote based on the MSRP (Manufacturer’s Suggested Retail Price). If the payment quoted falls within your budget, then you will know that the payment is something you can afford whether you negotiate below or at the MSRP.
Shopping for the best interest rate can save thousands over the life of the loan.
In summary here is the list of things to figure into the total cost: