Buying a car is usually one of the biggest financial decisions people make. Whether you’re looking for a brand-new Ford or a reliable pre-owned vehicle, it’s best to determine what you can realistically afford before stepping onto a dealership lot. How do you figure that out on your own?
Mike White Ford in North Idaho knows that purchasing a car is a significant investment, and we’re here to help you confidently navigate the financing process. Here’s a guide to help you calculate your budget, prepare for a car purchase, and find financing that works for you.
How to Determine Your Car Budget
When deciding how much to spend on a car, assessing your financial situation and setting a realistic budget is important. Here are the key factors to consider:
1. Follow the 20/4/10 Rule
A standard guideline used by many financial advisors to determine car affordability is the 20/4/10 rule:
- 20% Down Payment: If you’ve been saving up to buy a car, your goal should be to pay at least 20% of the vehicle’s purchase price upfront (for a used car, 10% is usually sufficient). A sizeable down payment lowers the amount you need to finance (borrow), meaning your monthly payments will be lower.
- 4-Year Loan Term: To minimize interest costs, keep your loan term at four years (48 months). However, if you intend to keep your car for a long time, do not rule out a 60- or even 72-month term if it makes your monthly budget more comfortable and you genuinely need a car that costs more. For example, if you need a truck for work or your family needs an AWD SUV to drive your kids in winter, be willing to accept the trade-offs for good reasons.
- 10% of Monthly Income: Your car payment should not exceed 10% of your monthly net (take-home) income to ensure you can comfortably meet other financial obligations and goals.
2. Consider Total Ownership Costs
The cost of owning a car goes beyond your monthly payment. Remember that your monthly payment will not be merely the sticker price you agree to with the dealership (or even a private party). The total cost of driving the car off the lot will include taxes, registration, and licensing, which in Idaho can add another 6% to 10% over and above the final purchase price. In addition, be sure to factor in the following as the costs of vehicle ownership:
- Insurance: Vehicle insurance premiums vary depending on the car’s make, model, and age, as well as on your age and driving record.
- Fuel Costs: Consider gas prices and fuel efficiency, especially if you have a long daily commute.
- Maintenance & Repairs: Routine maintenance, such as oil changes, brake replacements, tire rotations, and new tires, adds to the long-term cost of ownership. If you are purchasing a used car, depending upon warranties or age, you may also have to consider the cost of future repairs for parts and systems that wear. However, you may be able to avoid this uncertainty by purchasing an extended warranty that will cover the costs of any unexpected repairs.
3. Assess Your Current Financial Situation
Reviewing your financial status is critical before committing to a car purchase. Taking a good, hard look at your financial situation will enable you to make a better decision about what you can afford and when you should buy. The three factors that are most critical to financial institutions in determining whether to extend a loan are:
- Credit Score: Your credit score from at least one of the three major credit bureaus will determine the interest rate you pay and the type of loan you qualify for. A high credit score usually means you will be offered a lower interest rate, reducing the total cost of your loan. Even one percentage point can significantly affect the amount you must pay monthly and over the life of your loan.
- Debt-to-Income Ratio: Lenders consider your existing debt obligations and income when determining loan approval and interest rates. Depending on your downpayment and financial situation, lenders may also consider how long you have been employed at your current company.
- Savings & Emergency Fund: Ensure you have enough money for your down payment. You will also want to save money to cover any unexpected expenses and enough to cover vehicle payments for four to six months should you lose employment.
- Consider Pre-Approval: Many financial institutions invite you to apply for financing before starting car shopping. If your finances are in good order, consider applying for a vehicle loan early to determine what a lender, such as your current bank or credit union, will lend. Finding this out early will give you the clearest indication of what you can afford.
Remember that timing is important. Look at interest rates and see whether dealerships are offering incentives. Also, if your credit score is not as high as you would like or you don’t have enough saved up for a down payment, consider putting off your car purchase for a few months to work on those and put yourself in a better financial position. Putting yourself in the best financial posture will make it more likely that you can purchase the car you want.
Find the Right Car and Financing at Mike White Ford
Mike White Ford can help you find a car that fits your lifestyle and budget. Whether you’re looking for a fuel-efficient sedan, a powerful Ford F-150, or a family-friendly SUV, we offer a wide selection of new and used vehicles.
Our finance advisors will work with you to guide you through the financing process, ensuring you get the best possible rates and terms. Visit one of our showrooms in Coeur d’Alene or Sandpoint, Idaho, or contact Mike White Ford today to start your car-buying journey!