You are in the market for a new car. All of the advertising is doing its job and is making you excited to buy.
But can you really afford the car you are considering?
The truth is that not everyone can afford any car they desire. Depending on your financial circumstances, you might need to make some sacrifices.
This isn’t to say you have to settle for an old junker with 200,000 miles on the odometer.
But it does mean you might have to give up on the dream of buying a high end luxury car.
In this post, we will walk you through how to know when you can afford a car.
And in the case of you not being able to afford the one you desire, we will give you a few tips on how you can make the car of your dreams a reality.
How To Know When You Can Afford A Car
#1. Focus Long Term, Not Short Term
The very first thing you should do when trying to decide if you can afford a car is to look long term.
This means ignoring the monthly payment and instead focusing on the overall cost of the car.
Too many people focus on the monthly payment, or the short term. This gets them into financial trouble.
For example, let’s say you walk into a dealer and tell them you want a car with a monthly payment of $350.
All they have to do is get creative with the financing and you just bought yourself a $60,000 car.
If you had walked in and told the dealer the car you wanted and said you can pay $40,000 for this car, you will walk away in much better financial shape.
#2. Figure Out Your Monthly Payment
Once you have an idea of how much money you are willing to spend in total, you now can figure out what your monthly payment will look like.
Using the example above, if you buy a car for $40,000 and take out a 5 year loan at 4% interest, your monthly payment will be $737.
Can’t afford that much a month? Then you can’t afford a $40,000 car.
Some reading this might point out that you can take out a longer loan, like a 72 month or 84 month loan.
Doing this will reduce your monthly payment to either $626 or $547 a month.
In some cases, this might make buying the car possible.
But stop for a minute and think things through.
A car is a depreciating asset. This means as you drive it, it becomes less and less valuable.
When you go to sell the car or trade it in, you are not going to get very much for it.
By taking out a longer term loan, you are flirting with financial disaster.
For example, in 5 years, you might want to get rid of your car for another car in better shape. The $40,000 car is now worth $7,000.
The 7 year loan you took out still has 2 years left on it and a balance of $12,590.
If you get rid of your car and buy another one, you have to pay off this $5,590 difference. In other words, you need an extra $5,590 laying around.
Even worse, many people will roll this amount into the new car loan.
Let’s take this scenario out a few years.
You buy a new $40,000 car, but the loan is for $45,590 at 4% for 7 years. In 5 years, your new car is worth $7,000 and you want another car.
Your loan balance is $14,350. The process repeats and you roll the difference into your new car loan.
After the next 5 years, you have a car that is worth $7,000 and a loan balance of $14,904.
As you can see, you just keep falling further and further behind financially.
I know a friend who has been doing this for many years and many cars.
He recently bought a $25,000 car to try and save money. The problem is he rolled his old loans into his new one and is paying $800 a month for this car!
In 5 years he will have paid over $43,500 for a $25,000 car!
How to Afford The Car You Want
I know you want what you want. But sometimes you can’t have it all. With that said, there are some things you can do to make the car of your dreams a reality.
Here is a short list:
- Save more money. Cut back on some expenses so you can save money each month. Then use this money towards a down payment. The less you have to borrow, the more car you can afford to buy.
- Find extra income. Work a side hustle or sell things around the house to increase your income. Again, use this money towards a down payment. Even better, combine both these tips to super charge your down payment.
- Buy used. I know there is nothing better than that new car smell. But buying a used car is a smart move. It will have depreciated somewhat in value making it more affordable to you. And chances are, you will completely forget it was used once you start driving it.
The bottom line is there are things you can do to afford the car you want. But in some cases, this is still not enough and you have to consider other cars.
At the end of the day, affording a car is all about looking at the overall cost of the car and making sure you can afford this amount.
Don’t make the mistake so many others do and only look at the monthly payment. This short-sighted approach is only going to do more harm than good.
If you come to find you can’t afford the car you want, use the tips I outlined to put you in a position of being able to afford it.