Financial well-being September 21, 2015 By
Shopping for a car can be a daunting experience. First, you have to figure out what you can afford. Then you have to address all kinds of questions. Is the car reasonably priced? Should I buy new or used? There are so many decisions to be made! To help curb anxiety, plan ahead by breaking down the process. Here are some tips for you to consider:
To get started, calculate your gross household income. This is the amount of your wages before taxes and other deductions.
Second, make a list of your monthly expenses. This includes your house payment, other car payments, monthly credit card obligations, etc.
To determine your eligibility for a loan, your lender will look at the percentage of your total debt in relation to your gross income. This percentage should be around 35 percent.
Example:
If your annual gross household income is $60,000, total debt obligations should not exceed $1,750 monthly.
$60,000 x 35% = $21,000 or $1,750 monthly
The total of your current monthly debt obligations is then subtracted from the available monthly income. Assuming the payment for your house/rental is $1,000, credit cards are $100, and that pesky student loan is $200 (all of which add up to $1,300 monthly), you could afford a car payment of $450.
$1,750 - $1,300 = $450
Now that you have your budget set, it is time to visit your personal banker. They can confirm your budget is adequate by calculating these numbers and pre-qualifying you for a loan. They can also be very helpful when you need additional information about car values. Your banker will guide you through the car buying process so you don’t get caught up in the stress at the dealership. Also, if you are buying a used car from an individual, it is critical that your banker ensures the transfer of money and title between the two parties is done properly.
None of us fit perfectly into an income calculation model. You need to carefully consider your circumstances. Are you living at home rent free and not having to deduct anything for housing? Well I hope you like Mom and Pop, because for the next five years that you have the car loan, if you didn’t include something for housing in your debt calculation, you won’t be able to afford to move out on your own. Look ahead! Is your family going to need a second car soon? It’s important to consider things of this nature.
Here are some things to avoid if you choose to go straight to the dealership for purchase and financing:
- Do not provide your social security number and birth date until after you have made your decision as to which vehicle you are purchasing. Providing this information to multiple car dealerships and authorizing each to pull your credit report can negatively impact your credit score.
- Do not get distracted from discussing the price of the car. Some salesmen will ask you directly what your monthly budget is. Withhold this information and stay focused on the price of the vehicle. If you have done your homework and have already calculated a payment, you won’t find yourself years later with a worn out car and two years left to pay because the salesman gave you an 84-month loan when the life of your car was only 60 months. This is how people get “upside down” in their vehicle loans.
- Lastly, consider what you actually need verses what you want. This is very important! Be willing to walk away from a deal if it is not within your budget. You can always find another deal. Also, verify what the registration and insurance costs will be prior to the purchase. Avoid adding these large costs into the financing, which puts you further behind in paying off your car.
Enjoy that new vehicle! If you follow these simple guidelines and carefully think through the process, you should not experience buyer’s remorse. And, please contact myself or your local First United banker for support during your car buying adventure!
