Buying a car gives you a lot of freedom. You no longer have to live life by the bus schedule and you can stop bugging friends and family for rides all over town. You can hit the road whenever you like, and listen to whatever music you want on the way there. Unfortunately, that freedom comes at a cost.
Cars are getting more expensive
The average cost of both new and used vehicles are on the rise. According to data from Kelley Blue Book and Edmunds, the average cost of a new car in 2018 was $37,577 and the average used car cost $20,084 — the highest price since 2005.
With cars getting more expensive and Canadian budgets getting tighter, it’s important to be realistic about what you can afford to spend on a new vehicle. But, how much should you spend on a new car?
Everyone’s budget is different
Even if you and your neighbour make the same amount of money, your lifestyles, vehicle priorities and debt situations are probably quite different. Budgets don’t have a one-size-fits-all solution, but there are some expert-recommended spending ratios that can make it easier to figure out how much car you can afford without going into the red.
Here are 4 salary equations to consider:
Figuring out your debt-to-income ratio is a good way to see how much debt you’re already carrying and how much new debt you can responsibly take on and, by extension, how much you can afford to spend on a new car.
This calculation is based on your monthly take-home income compared to how much you spend in debt repayment each month. According to financial experts, the number to aim for is 36%. That means, if you make $2,500 each month, you should spend no more than $900 on loan payments, such as car payments.
Use this free calculator to figure out your debt-to-income ratio.
10% of your salary
This equation is based on your total annual income and is designed for the frugal car buyer. You’ll be able to buy a car that can get you from point A to B, but don’t expect much more with a budget of 10% of your salary.
To calculate this ratio multiply your annual income by 0.10 to figure out how much you can spend. If you take home $35,000 your budget will be $3,500 for a new car.
20% of your salary
This ratio is the same as above, but gives you a little more wiggle room while keeping you under that 38% debt-to-income ratio sweet spot.
Multiply your annual income by .20 to find out what 20% of your salary is and dedicate that number to a new vehicle. If we use the same salary ($35,000) you’ll have $7,000 to spend.
Keep in mind that neither of these equations include gas or maintenance fees. Read our post on budgeting for car maintenance to find out how much you should expect to spend on annual repairs and upkeep.
The 20/4/10 rule
The 20/4/10 rule takes a more holistic approach to buying a new car. Each number represents a goal for a different part of the transaction, with the overall aim being financial stability. The equation shakes out like this:
- Put a 20% down payment on your new car;
- Finance the car for no more than four years; and
- Keep your total monthly vehicle expenses, such as loan payments and insurance, to less than 10% of your income.
This tactic is beneficial because making a down payment will help you pay off your car sooner, a shorter loan term will save you money on interest and a monthly expense budget will keep you from overspending.
Each of these equations has pros and cons, but they can all help you figure out how much of your salary you should spend on a new car.
Your credit score is another number that comes into play when shopping for a vehicle because it can impact your interest rates and your ability to get approved for a loan.
Birchwood Credit specializes in bad credit car loans
Most dealerships and lenders look at credit as the be-all and end-all of vehicle financing. Because of this, shopping for a new vehicle with less than perfect credit can be stressful and intimidating — but it doesn’t have to be.
If you have bad credit, Birchwood Credit can help. Since we lend our own money through in-house financing we can look beyond your credit score to help you get approved for a loan that fits your budget and into a vehicle that fits your lifestyle.
What is a bad credit car loan?
In Canada, credit scores range from 300 to 900, with anything lower than 620 considered a poor score. Credit is used to determine your trustworthiness as a borrower and lenders often deny financing or charge high interest rates for folks with poor credit.
With a bad credit car loan through Birchwood Credit, we lend you the amount needed to purchase a car and you repay that loan through a monthly payment plan with a set interest rate.
Our application process is quick and easy
The worst part about applying for a car loan is waiting to find out if you’ll be approved. With Birchwood Credit all you need to do is fill out our online application form — which only takes three minutes — and you’ll know if you’ve been approved for financing within 24 hours.
We don’t need to see your pay stubs or any sensitive personal information, like your Social Insurance Number. We only require the following to get the application process rolling:
- What kind of vehicle you’re looking for;
- Your contact information;
- Your general employment history; and
- Some details about where you live.
You can also fill out an application in-person if that’s more your style.
We help people with all kinds of credit situations
Because our Financing Managers take a customer’s entire financial picture into consideration we can approve financing for many people who are rejected by other lenders. It doesn’t matter if you’re new to Canada and have no credit history or if you’ve been through a bankruptcy — we have experience with all credit types.
All you need to qualify for a loan with us is: a valid driver’s licence, Canadian residency and an income of at least $1,500 per month (or a salary of at least $18,000 a year).
Selection and service sets us apart
Whatever make and model you have in mind, there’s a good chance we have it in stock. Birchwood Credit is part of Winnipeg’s largest dealership network, which means we have a huge, constantly changing inventory of new and used vehicles at each of our three locations.
Our Financing Managers are bad credit experts who specialize in securing financing for customers with challenging credit situations. All of our team members are friendly and approachable and make customer experience their number one priority.
Stop by Birchwood Credit today or get in touch with any bad credit car loan questions you might have.