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How Much Car Can You Afford?

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This content is provided courtesy of USAA.

If you drool with envy every time a hot new sports car whizzes past you, consider this: Just because some drivers can buy expensive cars doesn't mean they can actually afford them.

The safe way to buy a car is to analyze your budget before you ever set foot in the showroom. Here are some steps to help you buy smart:

1. Set a monthly loan limit.

If you'll finance your vehicle with an auto loan, you'll need to decide how much you can comfortably pay each month.

  • Don't even think about the price of the car. Start by tallying all of your other monthly expenses and comparing the total to your monthly net income (after-tax pay) to get an idea of how much money you have to spare.
  • Keep your total vehicle expenses less than 20% of your net household income. This is not just your monthly vehicle payment, but also all related costs such as gas, maintenance, etc. For example, if you and your spouse bring home $5,000 per month, you should be spending less than $1,000 a month on your cars.
  • Consider your current debt load. Even if your car expenses are less than 20% of your pay, they could still detract from your ability to pay off other debt, such as credit card balances or student loans.

    To keep your debt under control, a common rule of thumb is to limit your total household debt payments — including mortgage or rent — to less than 36% of gross (pretax) income. So if you and your spouse make a combined $80,000 annually, you should pay less than $28,800 toward all debt each year.

2. Look beyond the sticker price.

Your total vehicle-related expenses stem from lots of different sources, only one of which is the price tag on the window. Don't forget:

  • Taxes and fees: State and local sales taxes, title and license fees, and other legitimate dealer charges could increase the total cost of your car by as much as 10%.
  • Interest: A low APR could make a big difference in how much you pay over the life of your loan. Get a pre-approved quote from your bank before you buy. USAA Bank is one source for fast, easy auto financing. Shop around and compare up-to-date incentive financing rates at the manufacturer's website.
  • Insurance: Don't use your current insurance costs as the barometer — the new car will likely be different. You might need to add collision and comprehensive coverage if you didn't have it before. Luxury and/or high-performance cars cost more to insure, as do vehicles that have lower safety ratings or a high frequency of theft. As you're budgeting, get a quote from USAA Bank for the new car. You can also get an estimate on your insurance costs by test driving USAA's Car Buying Service.
  • Fuel: If you're on the fence between a fuel-sipper and a gas-guzzler, don't dismiss the savings of a few extra MPGs — it can really add up over the years.
  • Maintenance and repair: Typically, high-end cars cost more to keep up. Some carmakers offer longer warranties or free scheduled maintenance programs that can save big bucks when break-downs occur.

Calculators like True Cost to OwnSM on consumer advocate site edmunds.com can help you see the whole picture. You can also explore USAA's Car Buying Service and look for vehicles that are designated as USAA Preferred. These cars usually have lower insurance, gas and maintenance costs when compared to others in their class.

3. Decide on a down payment.

In the not so distant past, most lenders required a sizeable down payment before issuing an auto loan. Now, buyers can get into a new car more easily, making little-to-no down payment and financing an expensive new car over five or even six years.

Here's what to consider when planning your down payment.

  • Interest adds up quickly. When you finance a large amount of money, you pay a lot more in interest charges. In fact, a large chunk of your payments for the first year will go to paying off interest. And if the car depreciates faster than you gain equity in the vehicle, you become upside down on the loan.
  • The more you can pay out of pocket, the better. Short of paying cash outright, the best way to buy is with a substantial down payment — shoot for 15% or more.
  • Leverage your old car. The obvious way to come up with a down payment is to sell your current vehicle. Trading it in at the dealership is convenient, but you can usually get more for your used car by selling it yourself. Estimate the fair market value of your car at sites, such as Kelly Blue Book. You can also place classified ads in your local paper and sites like Craigslist.com, Cars.com, Autotrader.com and others.
  • Consider dipping into savings. If your current car won't net you enough cash for a big down payment, don't stop there. Determine if you should pull some money out of your savings account, especially if the interest rate on your auto loan will be higher than what your money is earning in the bank.
  • At the very least, pay down the basics. Make sure you have enough saved to pay the title, tax and licensing fees upfront. Rolling these costs into the loan will be sure to leave you upside down when it comes to trading in your vehicle.

Once you have a firm grasp on all the numbers, try plugging in your estimates to USAA's auto loan calculator or other online tools to determine which vehicles fit your budget.

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