When you are in the market for a new car and you are considering financing (as most people do) – you need to know whether or not it is something that you can afford. Before you go through the entire credit application process, you should be confident that you will be able to afford the loan.
Before doing the math however, you need to make sure that you purchase an affordable vehicle. Unless you have a large down payment, keep in mind that the more expensive the vehicle – the more money you will borrow, and combined with interest, the higher the monthly payment that you will have to pay each month! Once you have found a car that is in your affordability range – then you can start to calculate what type of loan you can afford.
The best way to look at the affordability of an auto loan is through its monthly payments. You can easily determine how much of a monthly car payment you can afford to make by looking at your payment to income ratio. This rough estimate will guide you in the future when you are shopping for auto loans.
The payment to income ratio (PTI) is focused on a projected monthly car payment plus car insurance divided by your gross monthly income. Many people forget to factor in insurance rates and payments when they are trying to figure out the affordability of a car loan. Of course you also have to consider all of your other monthly revolving and installment debts when deciding if you can also afford this monthly payment.
It pays to do your homework and walk into a dealership knowing exactly what you can afford. This not only helps with negotiations but also keeps you in control of the entire buying process. An article on the Huffington Post.com, discusses the situation that can occur when you blindly walk into a dealership and you are roped into a loan and a monthly payment that you know you can’t afford, “This is not something you ever want to find out for the first time when you’re sitting in a car dealership and have already chosen a car and become emotionally attached to it. At that moment, you might go ahead and complete the transaction – high rate loan and all – because you have passed the point of no return on the purchase.”
If you are concerned about your credit eligibility, there are financing options available. At CarCredit.com you can fill out an application for the auto financing you need. You can also calculate your monthly payment on the online loan calculator – so you can determine ahead of time if it will be affordable. Car Credit.com also works directly with car dealerships that can offer auto loans to customers with less than prefect credit.
When you think about all that you gain by knowing what you can afford before shopping for a new car, especially your improved bargaining power — it’s well worth the advanced legwork to do the research and calculations before you walk in.
