Who doesn’t love the idea of driving around in a brand-new car? Not many people get to enjoy the fun of taking a new car out for a spin, let alone owning one. If you’re thinking about getting a new vehicle, maybe you’re wondering how much you should be spending for your car payment. Should you own, or should you lease? There are a lot of questions when it comes to cars and car payments, so let’s get into it.
New Car Info
Buy or Lease?
Firstly, you need to think about whether or not you want to buy or lease a car. There are a few reasons why you might go with either. Buying a car ensures that you’ll have an actual piece of property when you’re done paying for it, meaning you can resell it later to recoup some of the value. Remember, however, that cars aren’t investments, and they only ever lose value over time.
If you’re just wanting to drive a new car and don’t want very high monthly payments, you can opt for a car lease. A lease allows you to pay less than a new car payment, on average, and still drive around a brand-new vehicle. However, you have to deal with mileage caps (and fees if you go over) and you won’t own the car at the end of the lease.
What to Spend
If you decide to buy your car, you’re going to want to know what to spend on your car payment. Unless you’re fantastically wealthy, odds are good you’re not paying with your new ride in full when you walk into the dealership. As such, you’re going to need a loan from someone. You can go through a bank for an auto loan, or you can finance through the dealership.
When you look at your budget, don’t just see if you can manage a car payment. Try to get your payments as low as you can while still getting a reliable vehicle. For instance, if you make an average amount of money, it’s not wise to stretch your budget in order to scrape by making $500 (or higher) payments every month for several years.
Rule of Thumb
A good rule of thumb to follow is the 20/4/10 rule. This rules holds that you should make the down payment at least 20 percent of the car’s cost, you should never finance for more than 4 years, and you shouldn’t let a car’s expenses exceed 10 percent of your income. That ten percent needs to include car payment, interest, principal, insurance, gas and maintenance.
This might sound like it accounts for a very small amount of your money. That’s because it should! In general, you want to make sure you’re not exceeding this for your vehicle’s payments. Otherwise, you’re letting your car eat up too much of your monthly pay, and you’ll find it hard to save for anything or get ahead.
Could You Go Over?
In theory, yes, you could go over this rule of thumb. Many people who love luxury cars end up spending far in excess of ten percent of their gross income on their vehicle expenses. However, we highly recommend you make any exceptions to this rule with a very good reason. For instance, if you’re buying an electrical vehicle which will net you a tax break this year, you can include that calculation for the purchase.
Likewise, if you’re incredibly patient and simply save up the money for as much as half of the car’s value as a down payment, you can play with the numbers a bit more. However, it can be incredibly difficult to remain that patient, especially when you might not have the best vehicle for your current daily commute.