New Car Affordability and Your Finances

Those new car ads have been enticing you for months and you are about to do something you have not done in more than a decade: buy a new car. Like many Americans, you have been holding on to your current ride for at least 10 years, but just like these same people you are ready to get behind the wheel of a new ride. The appeal of modern technologies, better fuel efficiency or something as simple as a new car smell is beckoning you.

Before you head out to the car dealer, indeed even before you begin to search what vehicles are out there, you will want to determine how much vehicle you can afford. There are a number of factors in that determination, each one we will explore right here.

Your Credit

First things first: you need to know what condition your credit is in before shopping for a new car. That information is freely available in your three credit reports, data that is assembled by the credit bureaus: TransUnion, Experian and Equifax.

car keyYou can obtain your reports from AnnualCreditReport.com, a website that has been set up by the three bureaus to provide that information to you at no charge. You are allowed to get one copy free annually of each report. Obtain all three, check each one for accuracy and if you find mistakes, ask the bureaus to correct that information. Once you are certain that the information about you is current and correct, then head over to MyFico.com to obtain your credit score. That three-digit number will have a huge roll determining your loan rates and may have a bearing on loan approval.

Know that if your credit score is 700 or above, that you are in a good position to obtain favorable financing rates. However, the lowest interest rates are always reserved for people with excellent credit, a number that comes in around 750 to 780. If your score is low, let’s say below 580, then you are considered a candidate for a subprime auto loan. In this case, expect to pay a higher interest rate which may mean putting more money down on a new car or choosing a more affordable model. Yes, there are consequences that come with your credit score!

New Car Calculators

Many people advise consumers to sit down and work on a complicated formula to figure out just how much car they can afford. This process can take some time and usually leaves people frustrated. Instead, head over to of one of the websites that offer an auto loan calculator and get to work. Bankrate.com is as good a place to fiddle around with one as any other.

You probably already know how much money you can afford to pay out each month in loan payments. Add in your insurance costs, gas, maintenance and related fees and your total vehicle expenses will show up. If you can afford to pay $300 per month then you have a good basis from where to determine your loan amount.

Now let’s get down to practical matters of looking at specifics. For instance, you have your eyes on a Ford Fiesta SE Hatchback its starting price is $16,200 and with popular features added (minus a $500 rebate) your total is $17,500 including taxes and fees. Your current car is worth $2,500 leaving you with $15,000 to finance. Your credit is good, not great, but you still qualify for a 5 percent car loan for 60 months. Good news! With these terms you will pay $283.07 per month. That’s within your budget, so you are ready to buy.

Loan Shopping

We touched on your loan rate, but that number may vary depending on the lender. You should shop around for a loan as the interest rate and other terms can vary, saving or costing you money. A logical place to start is your bank or credit union, places where you already have an account established. As an account holder, you may qualify for a better new car loan deal especially if you agree to have your monthly payments deducted from your checking account.’

You car dealer may offer a great deal on a loan too especially if that loan originates with the manufacturer’s financing arm. Know what your total cost will be before signing a loan agreement. If you come in under budget, then you are good to go and will soon find yourself behind the wheel of a new car.


See AlsoWhat Every First Time Car Buyer Should Know

Author: Matthew Keegan
Matt Keegan has maintained his love for cars ever since his father taught him kicking tires can be one way to uncover a problem with a vehicle’s suspension system. He since moved on to learn a few things about coefficient of drag, G-forces, toe-heel shifting, and how to work the crazy infotainment system in some random weekly driver. Matt is a member of the Washington Automotive Press Association and is a contributor to various print and online media sources.

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