How Much Car Can I Afford?Aug 1th, 2020
How Much Car Can I Afford?
Know how much you can afford to spend on transportation each month to make buying a vehicle FUN, EASY and STRESS-FREE!
We will cover:
- how to determine exactly what you can afford to spend each month on your new car
- what you will be approved for
- how to shop within your budget, and live within your means
With this knowledge you can you can focus on finding the right people to buy the right car from.
Gross Debt-Service Ratio
I know, that's a mouthful. Let's explain.
To begin, you need to look at your monthly expenses versus your income. This is known as your gross debt-service ratio. Your TDS is the percentage of your monthly household income that covers your housing costs and any other debts. By law, in Canada, they will not approve a loan where your debt-service ratio is more than 42% of your total income. Here’s an example:
If you bring home $5000 per month after tax, the sum of your monthly car payment, rent or mortgage, and other monthly loans or credit card obligations need to total $2000 or less. This leaves $3000 for all other monthly expenses.
As a rule of thumb, you don't want to spend more than 20-30% of your take-home pay on a vehicle payment, but 10-15% is ideal. This leaves room for other transportation expenses such as gas/charging, insurance, and maintenance without stretching your budget too thin.
So if you bring home $5000 after tax, a car payment in the 10-15% range would be $500-$750.
But advertised payments only include MSRP, and Freight & PDI. What about sales tax or loan interest?
Let's delve a bit deeper.
Check Your Credit Score
It’s important to know what your credit score is to determine what rates you should actually qualify for. Unfortunately, 0% financing promotions do not apply to everyone – and not everyone will be approved. You can check your score for free without harming your credit on sites like Credit Karma. With this information, you’ll know roughly what rates you can get.
NOTE: YOU CAN CHECK YOUR CREDIT SCORE YOURSELF FREQUENTLY WITHOUT HARMING THE NUMBER. HOWEVER, APPLYING FOR MULTIPLE LOANS FROM DIFFERENT LENDERS WILL FLAG YOUR FILE AND MAY AFFECT YOUR CREDIT SCORE NEGATIVELY.
What About Down-Payment?
While $0 down loans are available, it may be difficult to qualify for zero down if you have relatively new credit or any previous bad credit. Cash is king – putting money down on your loan makes it easier to qualify, will reduce your interest expenses, and may even qualify you for a better interest rate.
Even if you have been previously turned down for a car loan, having 10-20% of the purchase price of the vehicle ready as a down payment, is a great way of turning a declined application into an approval. Indeed, many financial experts recommend putting at least 20% of the purchase price as down-payment on a car loan.
Get Pre-Approved for a Car Loan
Find out exactly what you qualify for and exactly what you can afford.
To get pre-approved, your best bet is to book an appointment a local dealership you trust to talk to a financial services advisor. They will be able to offer you personalized advice and guide you through what can be a complicated and stressful process. Dealerships like KIA Victoria have access to countless lenders and are adept at finding creative solutions.
To learn all about getting pre-approved check out this article: How To Get Pre-Approved For A Car Loan.
Study websites like your local dealership and Autotrader to research the price of vehicles that you are considering. Input these prices, and your estimated interest rate, into an auto loan calculator to reveal your monthly payment and budget accordingly.
But don't forget to leave wiggle room for products to protect your vehicle or added insurance. A good dealership will tailor these services and offerings to suit your lifestyle and only recommend what's absolutely needed. Many are invaluable.
We hope we've answered most of your questions here. If you'd like to start a preapproval process, let's chat! Start here.