When you set out to buy a new car, arm yourself with all the information you need to make the right decision. None is more important that determining how much car you can afford. All it takes is some planning and an understanding of how to work your personal budget for you to know exactly how much you can afford.

Budget Your Money

You will need to determine your monthly budget in order to first see how much car you can afford. Gather all of your bills together and develop a spreadsheet that will allow you to see what bills you have and how much they cost each month. Compare that number to how much revenue you generate on a monthly basis and that will let you know how much you can spend on a car. If you have some bills that can be paid off quickly then pay them and reduce your monthly debt. According to Consumer Reports, you should not be paying more than 36 percent of your gross monthly income toward bills. This is a ratio that the banks will use when considering whether or not to approve you for financing.

Calculate Your Payment

Getting a preliminary idea of monthly payments can help you budget for a car. There are many good car payment calculators on the Internet that can help you determine what the monthly payments would be for various car costs. Use the interest rate that is being given by your bank, reported on its website, and also figure in various down payments to see what amount will get you into the car price you want. In many cases a bank will require at least a 20 percent down payment on a car to get a good interest rate. If you cannot afford that much, then add one or two points to the going interest rate.

Pre-Approval

Your bank will work with you on a pre-approval amount when you are ready to go car shopping. Many times the bank will pre-approve you for a loan that may be out of your price range. This is when it is good to have some preliminary research done on how much of a car payment you can realistically afford based on your monthly budget numbers.

Source:

Consumer Reports - Car Buying Advice

Kelley Blue Book - 10 Steps to Buying a New Car

Edmunds.com - How Much Car Can You Afford?