Nothing beats driving a new car off the lot. Experiencing that new car smell and feeling the smooth ride of the vehicle as you course through Australia’s remote outback or sophisticated cities in your new vehicle is an exciting time. Buying a new car can be one of the greatest purchasing experiences a consumer can have, if you can afford it.
When looking for a loan to finance a vehicle, many people will head straight to the closest car loan repayment calculator for an estimated payment. While this is a great start to budgeting for a car loan, it only tells you how much your monthly payment is based on the information you have provided. In determining how much car is too much car, consumers have to take inventory of their own finances.
Keep reading to learn how you can avoid taking out a loan for your next vehicle that is beyond your means.
Evaluate Disposable Income
Before looking for a loan online, assess your finances. In evaluating your income, list all of your debts and add them up. Similarly, list all of your income and then add it up. Subtract your debts from your income, and this will give you your disposable income (the extras after your debts have been paid).
This is just the beginning, though, because while you might have extra money, consider the cost of living, which includes gas on an existing vehicle, groceries, and the million of incidentals that add up over the month. That stop to the coffee shop in the morning, that mid-morning snack in the staff lounge, and that online order from your favourite bistro all subtract from any extra income you might have.
Evaluate Your Debt-To-Income Ratio (DTI)
After assessing your finances, find your DTI by simply dividing the total debts by your total income. This percentage indicates how much money your household has to allocate for debt. DTI is important for two main reasons.
The first reason relates to telling potential lenders how much available income you have. The second relates to your total credit file and financial health, which might affect your interest rate. Be careful, though, because DTI only is a picture of how much money goes toward outstanding debts. It does not include payments for utilities, cable, or other bills that might influence how much money really is available in a month.
Include Car Maintenance Costs
Before shopping for a car, spend time researching car costs including the cost to maintain the vehicle. These costs generally relate to petrol, costs related to servicing the car, and costs related to insuring the car. If the car you are thinking about purchasing is foreign-made, consider how much it might cost to have the car repaired as well. This can help you get an idea of how much your car might cost including the monthly payment.
Offset High Monthly Payments
Going into the dealership with a great credit rating can guarantee you a lower interest rate. However, a sizeable down payment can significantly reduce your monthly car payment. These are just two of the ways to reduce your car payment when you secure financing.
Being realistic about what we can actually afford only comes from knowing what we actually owe. If you have to finance a car, consider getting yourself financially fit before you have to shop. This means re-evaluating the expenses mentioned earlier and making cuts when necessary.
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Avoiding A Loan Default
Knowing our financial picture can, in many ways, prevent a mishap that can create a financial disaster. Taking the time to conduct an honest financial evaluation gives consumers a realistic picture of what they can actually spend at the end of the month. Furthermore, it not only prevents overwhelming debt, but it can also prevent surviving on a tight budget in the near future.