How To Budget For A New Car

Figuring out how to budget for a new car is not as easy as it sounds. Buying any sort of a car is a major purchase that can put a huge dent in either your cash flow or your financial stability. Before deciding to finance the new car of your dreams, take a close look at your finances. What you want and what you need are often not the same thing, so learning to budget for a new car will save you from impulse purchases and the temptation to buy more car than you need.

1. Put together a monthly budget. Before you are able to figure out how much you can afford to budget for a new car, you need to assess your other expenses. Take a look at how much money you're making each month, and make a list of all bills and debts that need to be paid. Be sure to leave some wiggle room for entertainment and emergency expenses.
2. Run a credit check. Your credit can be one of the most important factors in getting you the sort of deal you want on a new car. If you have bad credit or previous credit issues, you may be turned down for financing, especially at larger dealerships. Also, beware the programs that target those with bad credit. While some are legitimate, many make their money from interest rates and fees designed to drive borrowers even further into debt. If your credit score is that bad, you may want to consider a co-signer, purchasing a used car through a private seller,  or leasing a new car until you get your credit back into shape.
3. Save for a down payment. Especially if you have credit issues or a low credit score, you're going to need a down payment to prove your credit-worthiness and give lenders a sense of your financial stability. If you have good credit, you may be offered no-down payment financing when financing a new car. This allows the loan to continue for a longer period of time, accumulating more interest.  The down payment will help you out in the long run.
4. Take an honest look at your finances. Typically, Americans overspend when putting together a budget for a new car. Financial experts suggest that the cost of your car payments, insurance, gas, and maintenance should be kept between 20-25% of your monthly income. Spend any more than that, and your new car becomes your personal passport to debt. Living outside your means is always harmful, but especially when financing a new car.
5. Research the value of your trade-in. Don't leave it to the car salespeople to tell you how much your old car is worth. If you're considering a trade-in, use the Internet to find a good estimate of what you can get at trade-in. If a dealership tries to sell you short, be cautious and explore other options.
6. Consider leasing rather than buying. It's always better to buy than to rent, but there are circumstances in which leasing a new car is the better option. Leasing is a great option while you're trying to put together the down payment for a new car, when you're trying to repair credit issues, or if you'd just like to drive a much nicer car than you could afford to buy. Read the fine print, though, and make sure you know what you're getting in to when you lease.

By taking the time to educate yourself about what your available options are and assessing honestly how much you can afford to budget for a new car, you'll end up a happy driver. Especially with the lackluster economy and sagging auto sales, it's possible to drive away with the new car you want, without sacrificing your financial future.

Source: "Buying A Car For Dummies", by Deanna Sclar