Car Buying Advice

Choosing a car:
In this section

• How much can you spend?
• What kind of car do you need?
• Narrow your vehicle type
• Pick the right model
• Model reviews
• Reliability information
• Fuel economy
• Safety ratings

Next section:
  At the dealership

How much can you afford to spend?

Determine the costs and price you can pay

You may already be dreaming of a model that has caught your eye. Or of features that will make your driving more pleasurable. But first you must face reality. The first step in buying a car should be to estimate what price range you can afford.

To do this, you need two pieces of information:
Down payment How much money can you pay up front in cash, with a trade-in, or both?
Monthly payment If you plan to borrow money, what is the maximum payment you can afford every month?

It’s easy to find an auto loan that requires a low down payment, perhaps 6 or 7 percent, or none at all. But to minimize your overall cost for the loan, put down as much as you can afford--preferably at least 20 percent. A higher down payment reduces the amount of money you need to borrow, which lowers your monthly payments and reduces the amount of interest you’ll pay overall.

A down payment doesn’t have to be all cash. If you already have a car, any trade-in allowance the dealer gives you for it can be credited toward your down payment. Or you can sell it yourself, which will usually get you more money than trading it in. But you may need to do it before you buy your car.

To get a ballpark figure for the monthly payment, Consumer Reports’ financial experts recommend that your total debt payment be no more than 36 percent of your gross income. Going by this rule, you can use the following steps to determine how much you can afford:

• Calculate what 36 percent of your gross monthly income is.
• Itemize and total all your monthly payments, including your mortgage or rent, credit card bills, and other installment loans.
• Subtract the total of your monthly payments from the 36 percent figure.

For example, if your pretax income is $75,000, total debt payments should not exceed $27,000 a year. If your existing debt payments equal, say, $20,000 a year, you can afford to pay $7,000 annually, or $583 a month, for car payments.

By knowing your down payment and monthly payment, along with a typical interest rate and the number of years you’re willing to make car payments (the term of the loan), you can calculate the price of the vehicle that you can afford and the loan amount for which you’ll need to qualify. You can see what the interest rates are by calling your bank, credit union, or other lending institution. You can also go online to see prevailing rates at www.bankrate.com.

To do the calculation, see our calculators and worksheets. Use the calculator called “What vehicle can I afford?” Any lending institution can also calculate this figure for you.

In addition to the vehicle price, you need to consider other costs, including:

• Sales tax
• Registration fees
• Insurance premiums

Taxes and registration fees can increase your out-of-pocket cost by as much as 10 percent or more, and driving a car that’s worth more than your current one will cost more to insure. Be sure to check with your insurance agent or get insurance quotes online so you understand what you’re getting into.