How To Figure Out What Car You Can Afford

Figure out what you can afford to spend before you visit the dealership

Before you even get in a conversation with a car sales person, you should already know (and be firm on) what you can afford to spend.

The sales person will definitely try to push you to spend more than you want to, after all, that's their job. You know your situation and what you can afford to put down, get on a trade, and pay monthly.

But how can you work that out to an actual sticker price that you should be looking towards?

There are a few good on-line calculators around, however, if you like the sense of accomplishment brought on by math homework, maybe this (somewhat easy) manual calculation is for you

Step One

Decide what you can afford, all-in, as a monthly payment. Don't forget to try to get an handle on how your insurance costs may change and also how you will be affected by the difference in fuel economy of your new vehicle.

Step Two

Multiply your decided payment about by 36, 48 and 60 (for 3, 4 and 5 year loans).

Add what you intend to include as a down payment.

Step Three

If you intend to offer your current vehicle as a trade-in, check out the latest version of the "The Black Book" to get an estimate of what your vehicle might be worth. Use the lowest value you see that applies to your vehicle as the lowest amount is probably what you're looking at if you decide to trade your vehicle in rather than sell privately. Once you have the value, add it to the amount from the first two steps to get a sub-total.

Step Four

Using your sub-total as a starting number, subtract 12 to 20% of the total for sales tax and finance charges.

If you live in a province without sales tax or are sales tax exempt, subtract 7 to 10% from the initial subtotal of your budgeted monthly payments.

Example:

Monthly budget: $500.00 per month
Cash for down payment: $5,000.00
Trade-in value: $10,000.00

Subtotal: $33,000.00 (36 months), $39,000.00 (48 months), $45,000 (60 months)

Now subtract for taxes and finance charges assuming 13% tax and 8% financing, for a total of 21%. (Multiply each subtotal by .21, and subtract that amount from the subtotal.)

That leaves us with $26,070.00, $30,810.00, and $35,550.00.

You will probably be able to negotiate off the sticker price so in this situation the buyer would be looking for a car with an MSRP of about $27,500.00 to 37,000.00.

Note

This will give you your estimated sticker price with which you can start your search and approach a sales person with confidence, but remember this calculation is only a rough estimate. You will pay different taxes depending on how much the sticker price is vs. how much you actually end up financing of that total amount.