One question that you may be asking yourself is how much car can you really afford? The bank is certainly willing to lend you the money for a car loan, but should you take what their estimate of what you will be able to pay over what you really can afford to pay? It is important to realize that banks will often lend you more than would be comfortable in most budgets. It is a balancing act when it comes to determining how much car you can truly afford.
Ideally you should pay cash for your cars. You can start saving now, then your truly know how much you can afford. There is nothing wrong with getting the nicest luxury car, as long as it isn’t breaking you financially. Saving for a car and paying with cash, guarantees that you will not spend more than you can afford to on a car.
If you find yourself in need of a new car (be it new or used) and you do not have the money saved up, you will have to take out a loan to pay for the car. So how do you determine how much you can afford? Is it simply a matter of sitting down and deciding that you can fit that monthly payment in your budget? How much money are you diverting from your retirement or long term goals to purchase this car?
The best advice I have ever received concerning this came from a friend’s father. He counseled that if you can comfortably afford the payments that will allow you to pay the car off in three years, then you can afford the car. His reasoning is that your financial situation is generally stable enough that you ought to be able to manage to make payments for three years. This will also mean that you owe less money, if something were to happen to you.
This may mean that you buy a used car versus a new car, or that you do not purchase the luxury car that you are dreaming of, but it can also mean greater financial security in the future. Once you payoff your car, then you can begin saving for a new one. The sooner you start saving the nicer your new car will be.
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