How to Choose a Car by the Payments You Can Afford

For long-term peace of mind, buy a car that's in your budget.

Many people who try to follow a monthly budget are thrown off when they arrive at a dealership to shop for a new or used car. It's always best to come prepared--paying particular attention to what yo can afford and the types of cars that are in your price range. This will help you avoid any sales pressure or simply giving in to your own desire to have a car that is beyond your means. Both leasing and financing are an option--leasing may provide a lower monthly payment for a driver, but is not for everyone. Research will provide the knowledge you need to shop for cars in your price range---you'll save time and money.

Instructions

1. Investigate your own credit rating. Obtain a free copy of your credit report from annualcreditreport.com, which the Federal Trade Commission notes "is the only authorized source for the free annual credit report that's yours by law." Confirm that your credit history is error-free. Make any corrections, if necessary, by contacting the company that has provided incorrect information. The interest you pay on your car loan will be governed by your credit rating; make sure you don't pay more than you have to because of mistakes.

2. Review interest rates online. Check the manufacturer's website for any new car you're interested in to determine rates, incentives and lease programs. Check with your bank--or another bank in your area--to determine rates in accordance with the term you need. For example; a rate often stays the same for a one to five-year loan, and increases for a six-year term. A seven-year term, if available, has the highest rate.

3. Apply for a loan, online or in person, with a local bank that you have found to have good rates. The approval process can take several days. Once you have your rate and term, you can determine where your credit stands and use your approval rate to figure calculations. If you got the lowest rate offered by the bank, it is safe to assume that you will qualify for any special rates at the dealer.

4. Enter calculations in an auto calculator, like the one at Edmunds.com. The auto calculator is prefigured with state and county taxes and fees---you must enter your zip code. You may find the dealer fees differ slightly, but only slightly. Enter in the price of a car and the amount of money you plan to put down towards your loan. Enter in the term and the rate to see your monthly payment. Only shop for vehicles in your price range, based on the auto calculations you figure. If buying a new car, enter in any manufacturer rebates and special interest rates that you found on the manufacturer's web page to see if you can afford a new car. The manufacturer's web page also allows you to view pricing with various options and accessories, so you can determine the correct manufacturer's suggested retail price.

5. Begin shopping. Search online for local dealers to review inventory and price range. Many dealers do not put prices on the vehicles that are on their lot, but do provide pricing to online shoppers. Visit dealers and let the sales representative know that you will not pay more than your budgeted amount. If you prefer to buy privately, use the pricing information you used to determine an affordable monthly payment as your guideline.

Tips & Warnings

• Manufacturer rebates change monthly. Be sure to review the incentives again before shopping to make sure rates or programs haven't changed.

References

• Entrepreneur: How To Budget and Lower Automotive Expenses

Resources

• Edmunds.com: Auto Loan Calculator