Your Step-by-Step Guide to Calculating Your Budget for a New Vehicle

Posted by Tom Clark on September 23rd, 2019

So, you have decided that your next step is to buy a vehicle – good for you! You may already have a vehicle, but its time is running out, or you may be purchasing a vehicle for the first time. Or maybe you want to have a second vehicle to use as a reserve or for a different purpose. Whatever your circumstances, it’s important to choose the right budget for your new purchase. It is an expensive endeavor, after all, and you want to make sure that you are paying only for what you can afford, and your other expenditures will not suffer. Here, then, is your step-by-step guide to calculating your budget for a new vehicle.

The three factors you should think about

There are three factors which can affect your budget: your down payment, your current vehicle’s trade-in price or value, and the amount of your vehicle loan. You can use a combination of these factors as payment for your new car, but if you’re lucky, you can pay in cash and be done with it. But most people will require some sort of financing, so think about this carefully as well.

Step 1: your down payment

Your down payment is the cash you have on-hand to go towards paying for the car. But even if you can pay for the vehicle in cash outright, think about keeping some of your savings for a rainy day. The experts say that you should have enough cash for about two months' worth of expenses. A good amount for a down payment would be around 20% of the car's price.

Step 2: trade-in?

If you have a car which you are planning to trade in or sell, make sure it is worth more in value than the debt you may still have on it. If it is, then you have equity for your trade-in. If your car has a value of ,000, for example, and you still owe 00 on it, then your equity will be 00 – which you can use for the purchase of your new car.

Step 3: monthly payments

You have to figure out the amount you can realistically pay per month on your vehicle loan. The experts would again say that you shouldn’t spend more than 15% of your gross (or take-home) pay on the monthly car payment. So, if you earn 00 per month after taxes, then your car’s monthly payment should only be 0.

Step 4: the length of your loan

The very final step is deciding how long you would like to pay for your vehicle loan. In other words, you have to determine the length of your loan. Once again, the experts recommend going for a loan that is no longer than 48 months (4 years). Of course, if you can afford a shorter loan length, that's even better. But if you cannot afford a loan that's less than four years, you should at least opt for a maximum loan length of 60 months or six years. This is because the longer your loan term is, the more interest you will pay – so it makes sense for you to go for the shortest possible length for your car loan.

If you want to save even more of your hard-earned money, you can opt for a used car instead, such as the used or pre-owned cars from used car Wyoming specialists like Rocky Mountain Yeti Evanston. With a used car purchase, you can pay as much as 50% less compared to a new car, and your registration fee can be lower as well.