How Much to Budget for a New Car
(What is a Down Payment On a Car)?
A down payment is an up-front payment toward the cost of your vehicle purchase. Down payments are used when you are financing part of your vehicle purchase, and they can help you receive a lower interest rate, along with the benefits of having a lower monthly payment on your vehicle.
While (acceptable forms of down payment for a car) may include cash, a personal check, cashier’s check, or a credit card payment, you should ask the dealership which types of down payment they accept. If you show up with the wrong type of down payment, it could delay the purchase of your new vehicle.
In general, the (best down payment for a car) is cash, since it’s cheaper for you and the dealer, and there isn’t a risk of your personal check bouncing.
(Does a Down Payment Go Towards the Car)?
For the most part, yes—your down payment is directly applied to the cost of a vehicle. If you decide to put $3,000 on a $15,000 vehicle, for example, this down payment will reduce the purchase price of that vehicle by $3,000.
In some cases, your down payment might also cover car registration and/or loan origination fees, if you’re financing part of your purchase. But these costs are all part of the overall cost of a vehicle, and your down payment will reduce the remaining amount that needs to be financed with a car loan.
(How Much Should I Save for a Car)?
The short answer is: It depends. While many car buyers have the option of financing most or all of their purchase, this might not be your preferred buying method. Saving for a down payment can help you lower your monthly payment on a loan and cover the potential cost of depreciation on your vehicle—which can be as much as 25 percent if you’re buying a new car.
For this reason, some money experts recommend saving at least 20 percent of the car’s purchase price to spend as a down payment on a new vehicle. If you’re worried about your ability to make monthly payments on your purchase, saving up a larger amount can help you practice the skills you need to continue paying off your car after a purchase.
Of course, if you don’t want to take out another loan, or want to save yourself the hassle of a monthly payment, you can also choose to save up the full amount of the car and pay the cost out-of-pocket. On the other hand, many car buyers are seeking a vehicle because they urgently need transportation for school, work, and other responsibilities. In this case, you may simply need to pay whatever you can as a down payment, and prioritize transportation over hitting a savings goal.
(How Much Should I Spend On My First Car)?
Financial experts recommend spending no more than 35 percent of your annual pre-tax income on a car. So, for example, if you make $15 an hour and work 40 hours a week, your maximum budget for a vehicle should be about $11,000.
By sticking to this limit, you can maintain control over your finances and avoid making a car purchase that puts you into financial trouble.
(How to Budget for a Car) Purchase
If you need to buy a vehicle now, there are two parts of your budget to consider: how much you can afford as a down payment, and the amount you can afford as a monthly car payment.
As you consider the amount you’re able to spend on a down payment, remember to keep money set aside to cover emergency expenses, including vehicle repairs. You should also look at your monthly spending budget and figure out how you can adjust your current budget to accommodate a new monthly bill.
If you’re really strapped for cash and need a lower car payment, you can opt for a longer repayment period, such as a (96-month car loan). While this long repayment term will mean you end up paying a higher total cost of the loan, it can be worth that added cost in exchange for short-term financial relief.
Budgeting for a new monthly bill is never easy, but by planning out how you can afford your next vehicle, you will be in a great position to afford that payment and enjoy all of the benefits that come with a new car.
