Determining What You Can Afford

Don't leap blindly into a Washington car loan without some idea of how much vehicle you can afford to buy. Follow these four tips to determine what your budget can handle.

1. Calculate the monthly payment. You can easily find calculators on various sites that allow you to figure out the monthly payment on your Washington car loan given your down payment, interest rate, and term. As soon as you have an estimate of your monthly payment, pull out your pay stubs. Figure out your gross monthly income. You should pass on vehicles or loans that result in more than eight percent of your gross income going toward your car payment. For people who carry significant amounts of debt (e.g., credit cards, high mortgage payments, student loans, etc.), the payment should consume even less of your income.
2. Be conservative on the term. The Federal Reserve reported that the average car loan in the U.S. has a term of 63.2 months. This is quite a departure from the former norm of 36 months. With the average American changing cars roughly every three years, terms this long are a major liability. The impractically small payments mean that your money is going toward interest, not principal, and your car is losing value all the while. In other words, by the time you're ready to sell your car, you will probably still have a year or two left on your loan, which will be worth more than the vehicle itself. You will then end up losing money if you change cars at that point. In figuring out how much car you can afford, do your calculations based on a 36-month Washington car loan.
3. Interest rates are everything. The competitiveness of the interest rate you get on your Washington car loan can make all the difference in what you can afford. The best way to find a good interest rate is to steer clear of the dealership and shop around online for car loan lenders. Most major banks now offer car loan quotes online, so there is really no need to visit their physical location. Compare at least two or three car loans before you settle on one.
4. Look beyond the sticker price. A car with a low sticker price might seem like a deal that you can't pass up, but you have to stop and consider the hidden costs associated with ownership first. For example, you might be able to find an unbeatable deal on a large SUV, but the long-term cost of ownership would have to reflect the added fuel expenses of such a vehicle. In calculating cost of ownership, you should consider fuel economy, repairs, car insurance premiums, and maintenance. Paradoxically, when you consider these factors, a car that is initially more expensive to purchase may actually end up the cheaper option to own.

Another thing to consider is looking into used vehicles.