How Much Car Can I Afford?

How Much Car Can I Afford?

July 20, 2018    Budgeting Advice

Whether you live on the east-coast, dwell in the prairies or are moving to a northern community — you need a vehicle to commute in Canada. Though travelling through our country is beautiful, it can also take a beating on your vehicle (and wallet), resulting in you having to buy a new car every five to ten years. But before you make that next big purchase, it’s important to ask yourself, “How much car can I afford?”

Before you drop by Birchwood Credit Solutions, we suggest you read this post to understand a few key concepts that could save you hundreds in the long run.
In this post, we’ll explain:

  • What affordable really means
  • The 20% rule
  • Understanding vehicle depreciation
  • What’s a car loan calculator
  • Budgeting for additional purchasing costs


What affordable really means

It’s easy to get wrapped up in buying a vehicle that looks good and meets all the needs on your wish list. But what’s more important than all that is ensuring you can afford your monthly payments.
We often see people thinking of affordability in one of two ways.

  1. Purchase a new vehicle so I don’t have to worry about maintenance and other problems that may arise with a used one.
  2. Purchase a used vehicle to save money upfront on a lease, loan and/or other special features.

The truth is, both of these assumptions aren’t necessarily accurate. Regardless of whether you buy new or used, you’ll have to budget it into your monthly income and spending habits.

Here’s a few things we suggest keeping in mind when it comes to determining what “affordable” means for your budget:

  • What your credit score is
  • How much money you have saved for a down payment
  • How quickly you want to pay off your new car
  • The sales tax in the province you live in (it’s 8% in Manitoba)
  • What interest rate you qualify for


The 20% rule

This is a rule many financial experts suggest. The rule is that your car payment and all other automotive expenses shouldn’t come out to more than 20% of your monthly take-home pay.

For example, if your monthly paycheck adds up to $2,500, the total of your car payment should be $500. Alongside that, you’ll also need to pay for gas, oil changes, insurance and other car maintenance expenses. So ideally, you’d want your car payment to only be $250 so you have the other half for those costs.

Though this calculation sounds ideal, your monthly car payment is really dependent on these two factors:

  1. Your down payment (and trade-in value if you have one)
  2. The length of your car loan


Understanding vehicle depreciation

It’s important to consider that once your loan is finished — especially if you’ve opted for a longer-running loan period — you could end up paying more than the vehicle is worth. All vehicles depreciate over time. In fact, your vehicle loses its value as soon as you drive it off the lot. And by the end of the first year, your vehicle could depreciate by as much as 10%.
This is where our helpful car loan calculator comes into play!

What’s a car loan calculator

A car loan calculator is a handy tool that determines how much your monthly payments will be based on the following three things:

  1. Principalthe total cost of the vehicle, including taxes, loan administration fees and any add-ons you choose
  2. Term — the length of time that payments will be made on your loan
  3. Interest rate — the percentage the lender is charging you to borrow the vehicle

Try our car loan calculator now!

Budgeting for additional purchasing costs

Now that you’ve determined how much car you can afford, you’ll want to take some other costs into considerations too. The sticker price isn’t the only payment you’ll have to make.
Here’s a few additional costs to keep in mind:

  • Fees and add-ons: Often times when a vehicle is advertised, it’s the base model you’re looking at. If you want a different colour or additional features, the price will go up significantly and the dealer will refer to it as “add-ons.” Before you fall in love with a vehicle, ask if it’s the base model.
  • Dealer-installed options: Some vehicle already have “extras” on them — like more expensive tires or an alarm system. If a car seems out of your price range, ask the dealer if there’s any installs that can be removed and see if that lowers the price.
  • Upsells and warranties: Finance managers may want to sell you additional warranties or features on a vehicle. At Birchwood Credit Solutions, we’re committed to transparency and ensure we tell our customers how certain options can benefit them.

At Birchwood Credit Solutions we want Manitobans, regardless of their credit history, to be able to drive a Birchwood vehicle, while also improving their credit score.  We’ll help you get into a reliable vehicle, with the option to refinance down the road if payments are made consistently. Auto financing is an effective way to rebuild or establish your credit score, impacting your life and future positively. When you’re shopping for your future car, Birchwood Credit is here to get you on the road to success.

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Rebecca Lake
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