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How to figure out how much car you can afford

When the moment comes to buy your first car, or replace the one you have, you’ll find no shortage of advicecoming your way from friends, family and acquaintances.

You’ll get different takes on whether to buy new or used, which make and model will best fit your needs, whether to go for an automatic or manual transmission and which accessories you should, or shouldn’t, equip your car with.

When it comes down to it, these considerations can be a distraction when it comes to considering the most important thing you need to focus on when buying a car, and this is how much car you can afford to finance in the first place. We’ve put together the following recommendations to ensure you buy a vehicle that fits your budget when shopping for your next ride.

Get fairer car insurance. Based on how you drive

Put together a monthly budget

This is the most basic and essential step in this process.

List all your existing monthly expenses, as well as discretionary spending like your monthly entertainment allowance, and see how much disposable income you have left once you have subtracted your total expenses from your net monthly income. Be realistic and include all expenses.

The amount of money you’re left with after expenses establishes the upper limit in terms of what you’ll be able to afford for all costs related to your new vehicle.

Figure out what you should be spending

There’s more to deciding how much car you can afford than having a broad idea of what you can afford each month without breaking the bank. Financial advisors recommend that you should use some basic guidelines to accurately identify which cars are in your financial league.

On the strict side of the spectrum, experts suggest that you should budget no more than 10% of your gross monthly income to cover all car expenses. A more moderate take is that you should not spend more than 15% of your monthly take-home income on your car every month. Financial planners favouring a more free-spending approach suggest that your car repayments, combined with all monthly debt expenses, should not exceed 36% of your gross monthly income.

Given the differences in opinion amongst financial advisors, it can be difficult to know who to listen to. The reality is that the approach you take should be tailored to your subjective perception of how important the car you drive is to you. Do you see a car as a purely functional item that is a requirement to get from A to B, or does driving a more expensive vehicle with a prestigious badge significantly enhance your enjoyment of driving and quality of life?

If you’re a functional car user, it makes sense to go with the more conservative approach to car budgeting and look at a vehicle that won’t use up more than 10% of your gross monthly income. If you’re a petrol head, then you’d probably want to get as much car as you can afford, while keeping your total debt payments within 36% of your gross income. If you’re somewhere in the middle, you’d be best served with monthly expenses somewhere between these two extremes.

Budget for the extras

Now that you’re equipped with a realistic idea of how much money you have to spend on your car every month, as well as how much you should be spending, you’ll need to budget for additional monthly ownership costs. This is critical, as these expenses can quickly turn a seemingly affordable car into a major expense.

You’ll need to assign a portion of your overall budget to:

  • insurance
  • fuel
  • maintenance and servicing
  • cleaning your car
  • parking.

If you already have a car in mind, use this to figure out what your likely expenses will be. You can use your desired vehicle’s make, model and year to get a free insurance quote online to establish a ballpark figure for your insurance costs. Once you’ve done that, read up on your car’s expected fuel consumption, then leave some headroom for parking and having your car cleaned.

If you haven’t purchased a maintenance and service plan with your vehicle, consider doing so, as this will ensure that this is a fixed, known and manageable monthly cost. If you do not take this option, it is advisable to put a fixed amount of money into a savings account on a monthly basis to cover services and unexpected maintenance issues as these arise.

Now that you know the cost of the extras, deduct this cost from the overall amount you should be spending. This gives you a realistic idea of how much you can afford on monthly repayments.

Shop for a car

After all the hard work, the fun part of this process starts. You can shop around for the best price on the car that you are looking for.

To do this you’ll need two things:

  1. A basic idea of which car you are in the market for.
  2. An online car repayment calculator.

You probably already have a car in mind, and you can find online car repayment calculators on most car manufacturer and banking websites. From there it’s straightforward to figure out if you can afford the car you have your eye on and start looking around for other options if you can’t.

Get quotes

Once you’ve found the right car, you’ll need to go through a final set of steps to ensure that it doesn’t exceed your budget. These will include:

  • obtaining an insurance quote for the specific vehicle you are interested in purchasing – and if you’re a young driver be sure to first educate yourself about what the most affordable insurance options for under 25s most likely are
  • securing a financing offer from a bank, who will conduct a separate affordability assessment based on the financial information you will be required to provide them with.

Once you have these, you’ll have an accurate final figure for the two major fixed expenses associated with the ownership of your new vehicle.

Don’t rush into signing any papers once you have an insurance quote and finance offer. You’re in a buyer’s market, and if you are prepared to bargain and shop around, you’ll find you can get better finance deals, cheaper insurance quotes and even a lower price on the vehicle you want.

If you don’t rush into signing anything, you’ll also resist falling into the trap of making an emotional decision at the moment of purchase. This will help prevent you from tossing all your careful planning and research out the window and buying more car than you can really afford.

Once you’re confident you’re getting fair value out of the vehicle seller, banks and your chosen insurance company, you can sign on the dotted line and collect the keys to your new vehicle.

Download UbiCar

UbiCar is the telematics app that rewards safe driving. Earn UbiCoins which you can use for online purchases and receive a fairer priced insurance quote that’s based on how you drive.