No matter where you live in Canada, having a vehicle of your own makes commuting a lot easier. When considering purchasing a vehicle, having a good understanding of the costs involved above and beyond the sticker price is crucial. There are lots of additional fees that can cause the price of your dream car to feel out of reach. But don’t be discouraged! In this article, we break down how to buy an affordable car into five steps so you’ll have a better understanding of the considerations to have.
Buy an affordable car…Where to start?
To accurately determine how much you can afford for a car, follow these steps:
Step 1: Determine your budget
Before making any purchase, the most obvious step is to base your affordability on your income. It’s important to use your after tax income or “net” pay, and not your pre-tax or “gross” income. This will give you a more accurate idea of how much money you can afford to spend. Always base your calculations on your current income, not on any perceived amounts that may come in raises or bonuses.
The cost of buying and financing a car involves more than just the ticket price. In addition to the purchase price of your vehicle, there are various other expenses to factor into your budget, including the following:
- Fees: Car registration fees, sales tax, dealer fees, freight fees, pre-purchase inspection fees, and so forth.
- Add-ons: Starting price is for the base model with no additional features. If you choose to add additional features that are not included in the base price, you’ll need to pay extra for each one.
- Warranty: New car purchases typically come with a basic factory warranty. This covers just about everything on the vehicle except wear and tear items, such as filters, brake pads, and tires, among others. But if you want an extended warranty, you’ll need to pay for it.
- Fuel: Estimate roughly how far you drive every month and how often you have to fill the gas tank to get an idea of how much you can expect to pay for fuel each month.
- Repairs and maintenance: Cars need routine maintenance to keep them running smoothly and safely. That includes paying for services, such as oil changes, car washes, tire rotations, and so forth.
Step 2: Deciding how much to spend on a vehicle
Once you’ve determined your true budget, there are a couple of ways to go about determining what you should spend on a vehicle:
- Review your budget and determine how much you can reasonably afford to spend on a car monthly.
- Consider your savings and how much you’re willing to spend upfront on a down payment.
- Use the 20/4/10 rule: 20% on a down payment, a loan term no longer than four years, and 10% of your pre-tax income on car loan payments and operating costs.
- Use the 10% to 15% rule: 10-15% of your pre-tax annual income is a benchmark for car loan payments and operating expenses.
Step 3: Determine how much you can borrow
Once you’ve calculated the monthly car payment amount that best fits into your budget, you’ll have a better idea of how much you can borrow. When you don’t have the cash on hand to pay for a new car, a car loan can help you buy it — whether the vehicle is new or used. When you get an auto loan, you borrow money from a lender to buy a car.
With your budget in hand, you can figure out how much your monthly payments will be, including interest and taxes, by using an Auto Loan Calculator tool. Simply enter the following numbers into the car loan calculator:
- The price of the automobile
- The down payment
- The length of the loan
- The sales tax in your province
- The total interest rate
Factors to consider when buying an affordable car:
- Your credit score: The higher your credit score, the better interest rate you’ll be offered and the more money you can save.
- Your loan term: A longer term means lower monthly paymentsy, but can also translate to paying more interest in the long run.
- Your current debt load: A high income may give you more money to work with when taking out a car loan, but your current debts should be manageable before adding another payment to the mix.
- Whether you’re buying new or used: New car loans typically come with lower interest rates in comparison to used car loans.
- Your savings: If you have adequate assets on the back-burner, this can provide you with a financial cushion. The more assets you have to your name, the more your lender may allow you to borrow.
- How much you have saved for a down payment: The more you can pay upfront, the less your monthly payments will be, or the shorter your loan term.
- The sales tax in your province: In Ontario, it’s 13%, but it changes from province to province. Sales tax will affect how much you can afford.
- The interest rate you qualify for: The lower your interest rate, the less you’ll spend and ideally, the more car you can afford.
It’s easy to find a car loan with no down payment, but most lenders prefer between 10% and 20% upfront when you apply for car financing. Having a large down payment lowers the amount you need to borrow to pay for the car, making it easier to qualify for a loan.
Step 4: Shop around for cars
At this point, you should have a figure in mind for the down payment and monthly operating costs, including car payments and other car ownership expenses. Now you can begin shopping around for cars that are within your budget. Make sure to research the car price, insurance, gas, repairs and maintenance, and other costs of ownership. Fortunately, most of this information can be found through various websites:
Additionally, you should take it for a test drive when you’re ready.
Step 5: Add it all up!
Once you have a few cars in mind, it’s time to put your budget to the test. Do the cars you want actually work with your budget? The total cost of buying a car doesn’t end at the ticket price of the vehicle. Be sure to factor in sales tax, registration fees, documentation fees, auto insurance and other expenses. If you find that the cars you want don’t fit within your budget, you have a few options. Either explore cheaper cars or revisit your budget.
Remember, our isure representatives can help you find savings in your monthly budget – either by bundling your home and car insurance policies, or suggesting money-saving endorsements on your car policy. And remember, if the numbers don’t add up, it may not be worth stretching your budget too far to have your dream car. Take into account what the car is used for and how important a panoramic sunroof or leather seats are to your daily commute.
We hope our five steps to buying an affordable car make your next purchase a little easier. If you need assistance to make the numbers work more in your favour, give us a call today!