What’s your car shopping budget, and how much car can you afford?
So, what is your new car shopping budget? You have decided to start car shopping again or maybe for the first time. Before you can decide on a car you have to determine your car shopping budget. There are two ways to figure your car shopping budget. The fist way is monthly payment, which can be a little muddy. We’ll discuss how muddy in a few minutes. The second is total dollars, which we think is the best way to negotiate.
So, how do decide what number is the right number? What has to happen in order to go from a $300 per month car payment to a $500 per month car payment? Or, what do you need to know to go from a $25,000 car to a $32,000 car (the current national average price for a new car). An easy place is to start with your last car payment. Do you want to spend more or less? Do you have a choice? Cars are more expensive today than they were just a few years ago. If you are like many American’s who have been driving their car for more than 10 years, you are in for a surprise.
For most of us we want to expand our car shopping budget to buy more car (more features or a higher trim level). So, how do you do that? You can buy a used car or a certified pre-owned car. You could also look to save money on support services like insurance, extended warranty, or car financing. Well… how do you do that? You start shopping for those services while you are shopping for a new car. Your car shopping budget should include insurance, warranty, financing, maintenance, fuel costs, and repairs. Your car payment is just the beginning of the process of defining your car shopping budget.
Here’s a link to a great video on planning your car shopping budget. We think that saving money is all about education and in this case knowledge is not only power, its money – back into your pocket. As Benjamin Franklin once said, “a penny saved is a penny earned.”
So, let’s talk about what to do with this idea of shopping by car payment. A car payment is made up of three pieces – total amount being financed, interest rate, and term of loan. Each component can be manipulated and negotiated to lower your monthly payment. However, if you try to shop by payment without digging into what goes into the payment, you give the dealer control over the manufacturing of your car shopping budget. And… you do not want to do that!
Anatomy of a car payment:
1. Amount being financed = Total price of car including taxes and fees minus down payment
2. Interest = The amount of money the bank will charge your for financing the car
3. Term = The length of the loan (how long will you have to make payments)
It is a far better idea to negotiate total price and use an auto loan calculator online or an app on your phone to manipulate the variables. If you get price right and understand your credit situation, then you can negotiate car price and rate separately to ensure you get the car payment that fits your car shopping budget. If you are credit challenged, we recommend you work on your credit score when you start your car shopping process. By start, we mean – the first time you consider buying months before you plan to buy. If you really want to expand your car shopping budget, you have to lower the interest rate. In order to do to lower your cost of borrowing, you have to improve your credit score. Once you’ve done that you can negotiate better interest rates.
Another way to expand your car shopping budget is to take advantage of new car rebates and financing specials. Rebates and specials should be a part of your shopping process as you get closer to time to buy since these promotions change pretty much every month.
The answer the questions… how do you go from a $25,000 car to a $32,000 car is:
1. Improve your credit score to lower interest rates and auto insurance payments
2. Get comparative quote on auto insurance – you have to consider options other than your current carrier
3. Use rebates and factor incentives to save money on the total cost of the car
4. Consider buying certified pre-owned or a traditional used car as opposed to a brand new car
The combination of these tactics could save you hundreds of dollars per month and thousands over the life of your car loan. Smart car shoppers don’t just car shop, they expand their car shopping budget too.