How much can you Afford for a New Car?

Everyone knows about the credit crisis that occurred in the mortgage company but less publicized is a similar situation with the auto loans.  Many consumers financed automobiles and then ended up upside down, owning more on their auto loan than the car was worth.

Many people are unaware that one of the problems with the decline in the auto industry today is that many people purchased cars they could not afford.  Statistics show that last year approximately 25% of consumers who purchased a new vehicle had a negative equity  (over $4,000) that was rolled over from their old car on their recent trade in.

Consumers were encouraged to purchase cars that they could not afford and in order to get applicants qualified, interest payments were too high compared to what was paid on the principal for these loans.

So how can you be sure that you are not paying too much on the next car you purchase, how much can you really afford?  Feel free to use the steps below as a guideline;

1. Add the amount of your down payment with the trade in value of your old car and then subtract the total from the price of your new vehicle.
2. Find out what extra fees there will be, for example sales tax, dealer’s fees, license, or registration transfer fees, and add those to the purchase price.
3. Calculate your interest rate on your loan and estimate the difference in your payments dependent on the length of your loan, your payments will be more with a shorter term, but you’ll pay less interest and have a lower chance of being upside down on a shorter loan term.
4. Use an online calculator to enter your loan terms and estimate your monthly payments.
5. Contact your insurance company to find out how much your insurance will cost, breakdown the total by how much the cost for insurance will be monthly, and include the insurance payment in your monthly car payment.

According to an online report by financial experts, your monthly car payment should not exceed more than 20% of your total monthly net income