What You Need to Know Before You Buy a New Car
Remember when you were growing up and the car manufacturers would unveil the next year’s models every fall? And all the car enthusiasts would lose it as they made a mad dash to the dealership for a test drive.
Ah, the Wonder Years. Pardon us if we sound a bit like Grandpa talking about the good old days, where we walked to school uphill, in the snow, and wore long underwear.
Speaking of yesteryear, we also remember how hard it was to finance a car. As in buying a car meant potential car owners had to save up enough cash to pay for their car in full. Not these days, though.
These days, new models of cars roll out year round and owning a new car has become easier with financing options flexible and affordable.
But listen. We don’t want to be the party pooper – far be it from us to stall your dreams (see what we did there?) of owning that dark blue Ford with leather interior that has people on the sidewalk going saucer-eyed. It’s worth mentioning though that just because longer-term loans afford you lower monthly payments and opens up options for sleeker, more expensive models, doesn’t mean you should run out and go get said fancy car.
If you’re ever in doubt about what you can or can’t afford, just remember the golden rule of financing: you should put down at least 20%, finance for no more than 4 years, and keep your monthly car payments at or below 10% of your gross monthly income.
A higher down payment, like one of 20%, helps reduce your monthly installments and minimizes your overall cost. Plus, there’s the added bonus of reducing the interest you’ll owe.
Keep in mind that a down payment doesn’t always need to be in cash – trade in’s are perfectly acceptable (5-second shout out: at BC Drive, we work with trade-in’s!), the value of which can be used as a credit towards your new car.
Not sure what you can afford? Use the following steps to see where you land:
- -calculate what 36% of your gross monthly income is
- -itemize and total all of your monthly payments, including rent and credit card bills. You may want to consider cutting out a few items that aren’t a necessity (those coffee shop trips? Friday night beer runs?)
- -subtract the total of your monthly payments from the 36% figure
For those who have only just had their first cup of coffee and need a bit of help, broken down, if your total income for the year (before tax) is $75,000, then your total debt payments should not exceed more than $27,000. If your existing debt equates to something like $20,000 a year, you have $7,000 annual to spend on car payments (roughly $585 a month).
Math is hard. We know it’s not fun to do. It’s also not fun to sit a take stock of your finances. But it’s vital to know before you go signing a new lease on a car that you may only be able to just barely afford. Do the less fun things first before you get to the more fun things: test driving your car.
Rules aside, at BC Drive, we know that everyone’s financial situation is different. We also know that if you need a car now you need a car now. Not later. Not after you finish that rerun of Seinfeld. Now.
The 20/4/10 golden rule is a guideline – nothing more. If you don’t have the cash for 20% down and you can’t take the 1-1.5-hour bus commute complete with 3 transfers and BO from your seat neighbours, then put down less, by all means.
Do try to keep your monthly payment under 10% of your gross income, though. Your dream car isn’t worth having if your monthly payment eats up all the extra room in your budget. You can’t eat a four-door Hyundai, after all. Not to mention, you have no idea where you’re going to be in a year, let alone tomorrow. Staying below 10% means you’ll have money set aside for any change in circumstances, such as a pay cut, a job loss, or injury.
So before you buy that car, before you set your soul on that chevy, Ford, or Mazda, think about what you can afford, what would break the bank, and what would leave you eating ramen noodles for up to 4 years. Because while it may look flashy and feel good to sit in, it pays to live within your means.
Lucky for you, you have BC Drive to help you figure out what auto-financing options are available to you. Have you seen what we can do for you today?