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In the United States, there are around 17 million new vehicles sold each year, from cars to pickup trucks.

Buying a new car is a fun, exhilarating experience. Having something new feels different, but it comes at a much higher cost than a used car. Making sure you can afford the new car of your dreams will help save you from a lot of stress in the future.

Here’s how you can tell what you can afford and how much your budget is.

Traditional Budgeting

There are a number of traditional budgets aimed at helping people understand what they can afford. When it comes to buying a new vehicle, it is important not to overextend yourself. If you do, it could result in the vehicle being repossessed or you having a problem you can’t afford.

Even if you could afford a bit more, financial stress can tear apart your life. You don’t need to experience hardship because you want a new vehicle. If you follow the budgeting rules that we’re going to talk about, you won’t have any trouble.

The 10%-20% Rule

One of the most common ways to budget for a car loan is to use the 10%-20% rule. This rule states that you should never spend more than 10% of your yearly income on payments. On top of that, your total car expenses should never go above 20% of your total income for the year.

This would mean that someone making $40,000 a year shouldn’t spend more than $4,000 on car payments. If we break that down by twelve, so $4,000/12, we get $333.33 in monthly payments. If your payment is over that, it would be out of your budget.

Many will point to this as being a conservative estimation of what can be afforded. The reality is that you want to have enough money on hand to cover emergencies. If more than 10% of your earnings go towards a vehicle, 25% goes towards housing, that is over 1/3rd of your money.

Test Yourself

One of the best ways you can see if this budget will work for you is to test yourself. Take 10% of your money and put it into a savings account for a few months. This will help you adapt to the financial reality of owning a new vehicle at the payment level you can afford.

If you find that you aren’t facing any hardship from this amount, you can even increase it a bit. When you reach a point where it starts to stress your finances, then you know what you can afford.

The 20/4/10 Rule

Another way of budgeting a vehicle is the 20/4/10 rule. This is a bit more strict and goes more in-depth on how the money is spent. What the numbers mean is a 20% down payment, financing for four years or less, and a total expenditure of around 10%.

This rule takes into account the continued stress on your finances that a car loan brings. A 20% down payment is not necessary in most cases, but it will help you lower the overall cost of the car. The reason for this is that all 20% goes towards the principle of the loan, not the interest.

The best thing to remember about this rule is that if you can get a car under these stipulations, it will be easy to pay on. This rule is even stricter than the 10-20%, so you should have no problem. But what if you don’t want to have a strict budget or want a car out of range?

Priorities and Capability

There is no hard and fast rule that applies to everyone. Each individual person and family will have budget constraints unique to their situation. In this case, it is important to have a car budget of your own.

There are other concerns that may be at play that require a greater commitment. A work truck, for instance, is an example of a vehicle that may not fit into a predetermined budget. It could be something that allows you to continue working and making money.

A family or person's capability to get good loan terms will also have a big impact on their future car buying experience. The higher your credit score, the more you will be able to afford. Despite this, because you have bad credit doesn’t mean you won’t qualify for financing.

In the end, only you can make a decision about how much you can afford. The key principle is to limit the amount of strain on your finances while getting as nice a vehicle as possible. There are a lot of advantages to getting a new car. It can even be cheaper in the long run.

Benefits to New Vehicles

While the cost of buying a new vehicle is much higher than a used vehicle, that doesn’t tell the whole story. New vehicles have much better warranties and don’t break down as often. It is common for a new vehicle to go the entire term of the loan without having any mechanical problems.

With a used car, you don’t spend the same amount upfront or over time. You do have to cover a lot more expenses when it comes to repairs and replacement parts. These expenses add up when you consider that many cars will last up to 250,000 miles at least.

Having a brand new vehicle is also something that gives peace of mind. If you need to make a long-distance trip, a new car can give you the confidence you need. The chances of a new car breaking down are remote.

Buying a New Car

The right vehicle for you is waiting on the lot for you. Buying a new car is not only about getting a great looking vehicle. It’s about long-term peace of mind and stability.

If you are ready to take the next step in your car buying journey, visit our location so we can start your journey together.

Categories: New Inventory