How Much Should You Spend on a Car? Here's How to Find Out

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Follow these steps to avoid buying a car that's out of your budget.

It's time to buy a car, but you're not sure how much you can afford to spend. Calculating the monthly cost of a car isn't as simple as looking at its sticker price. You'll want to take into account additional expenses like auto insurance and maintenance. And if you can't pay for the car in cash, you'll also need to take out a personal loan.

To help you out, here's how to figure out exactly how much you can afford to spend on a car.

Decide how much to put down in cash

The first step is deciding how big of a down payment you can afford to make. It's wise to put at least 20% down if you can. If you're buying used, you can get away with putting 10% down.

This down payment will help you avoid going upside down on your loan, which is when you owe more than your car is worth. Plus, the bigger your down payment, the smaller your loan. This means smaller monthly payments, paying your loan off earlier, or both. Borrowing less will also save you money on interest.

Get pre-approved for a car loan

You can get preapproved for a car loan by most banks and credit unions to get an idea of the rates you qualify for. In some cases, applying for pre-approval won't impact your credit score. But if a lender performs a hard credit check, this type of inquiry will go on your credit report and can drag down your score a little.

However, most credit scores will lump all car loan applications made within a short period of time into one inquiry, which will have a minimal impact on your score. So try to do all your shopping around in a short time frame.

Pick a week to shop around and apply for car loans with a variety of banks and credit unions so you can get the best rate possible. Once you have your pre-approvals, you should know how much you can borrow and whether you qualify for a good interest rate. This will help you with the next step.

Calculate your total monthly payments

At this point you know how much you want to put down and what rate you qualify for. To figure out how much personal loan you can get to buy a car, use a car loan calculator to estimate your monthly payments.

Play around with the loan amount until you get to a monthly payment you feel comfortable with. You'll notice that the longer your loan term is, the lower your monthly payment will be. However, this also means being in debt for a longer period of time and likely paying more in interest.

For example, if you borrow $15,000 at a 4% interest rate for 60 months, you'll have monthly payments of $276 and pay $1,575 in interest over the life of the loan. If you shorten the loan term to 36 months, you'll make monthly payments of $443, but you'll only spend $943 in interest. It's wise to try and minimize the interest you pay, but make sure you land on a monthly payment you can comfortably afford.

Don't forget to factor in car insurance

When it comes to owning a car, auto insurance is likely to be your biggest monthly expense, so it's important to add this into your monthly budget. You can easily get car insurance quotes online that will give you an idea of what you'll pay. Once you consider how much a car insurance policy costs, you might have to dial down your car budget a little.

Make sure to get quotes from several different sources to find the best cheap car insurance. However, don't skimp on coverage. Decide how much car insurance coverage you really need, and then get a quote for the monthly premium based on those coverage levels.

Estimate maintenance costs

You should factor routine maintenance expenses into your monthly cost as well. It's recommended you set aside at least $50 per month for maintenance costs like oil changes and unexpected repairs, according to AAA.

Of course, exact maintenance costs will vary depending on the car you buy. An oil change on an older Honda might only cost $30 to $50, while an oil change on a nice sports car can easily cost a lot more. You can look up the recommended maintenance schedule for any car you're looking at and then look up prices for each of those services.

By putting in the work of estimating your monthly car ownership costs beforehand, you can make sure you're getting a car that's truly in your price range.

RELATED: See The Ascent's guides to the best car insurance companies.

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