1. Autos
Send to a Friend via Email

Your suggestion is on its way!

An email with a link to:

http://cars.about.com/od/buyingadvice/a/new_car_budget.htm

was emailed to:

Thanks for sharing About.com with others!

You can opt-out at any time. Please refer to our privacy policy for contact information.

Discuss in my forum

How to set a new car budget

Figure out what you can afford to spend before you visit the dealership

By

Before you leave to go car-shopping, it's best to figure out exactly how much you can afford to spend. You know what you have to put down, you know what you can afford per month -- but how does that translate to a sticker price, especially taking into account taxes and finance charges?

There are several car-payment calculators that will do the math for you (you'll find one here from About.com partner Cars.com). However, if you prefer to do the math manually, here's a relatively simple method.

First, figure out about what you can afford to pay per month. Multiply this figure by 36, 48 and 60 (for 3, 4 and 5 year loans).

To each of these figures, add what you can afford for a down payment. If you are trading in a car, visit a used car pricing site, such as Kelly Blue Book, to calculate the car's approximate value (use the trade-in value, which is the lowest figure and represents what you can probably expect the dealership to offer) and add that to your subtotal.

Finally, subtract 12 to 20% of the total for sales tax and finance charges. (This isn't totally accurate -- you'll be paying tax on the whole price, but finance charges only on the amount you actually finance -- but remember, we're estimating. If you live in a state without sales tax, subtract 7 to 10% just from the subtotal of your budgeted monthly payments.) That will give you a guideline as to how much you can afford to spend.

Example:

Monthly budget: $400 per month
Cash for down payment: $3,000
Trade-in value: $8,000

Subtotal: $25,400 (36 months), $30,200 (48 months), $35,000 (60 months)

Now subtract for taxes and finance charges -- we'll assume 8% tax and 7% financing, for a total of 15%. (Multiply each subtotal by .15, and subtract that amount from the subtotal.) That leaves us with $21,590, $25,670, and $29,750.

Considering that you will probably be able to negotiate off the sticker price, you should be looking at cars with an MSRP (sticker price) ranging from around $22,000 to $30,000.

  1. About.com
  2. Autos
  3. Cars
  4. Buying Advice
  5. Budgeting for a New Car Purchase

©2014 About.com. All rights reserved.