The process of buying a car can seem intimidating, especially when it comes to choosing the right make and model for you and determining how much you’re comfortable spending. For most people, buying a car is a big investment, second only to purchasing a home. According to Forbes, the average new car price surpassed $50,000 for the first time in history. If you’re thinking of buying a car, there are many factors to consider when determining what you will be able to afford monthly and how much you’ll be able to invest up front.

Establish a Budget
It's a good idea to create your budget before car shopping and see how a car payment fits into your financial plan. Take a few minutes to understand your monthly spending. Add up all your fixed expenses such as rent/mortgage, utilities, phone and other recurring monthly bills including the easy to forget monthly subscriptions. Include money you set aside each month for savings, insurance premiums and payments on existing loans, including credit card debt. From your monthly take-home pay, subtract your monthly expenses. What’s leftover will help you determine the amount you have to budget for a new car. Remember, within your monthly car budget, you need to consider the cost of insurance, registration and the regular maintenance needed. You may want to shop around for car insurance before you purchase a car to get a sense of how that will affect your budget since insurance rates can vary significantly, depending on the vehicle. Aim to spend less than 10% of your take-home pay on your car payment and less than 15% to 20% on car expenses overall, including your car payment, insurance, routine maintenance and fuel. For example, if your take-home pay is $4,000 per month, then you should spend no more than $400 to $600 on transportation costs. For more tips on establishing a budget, visit our Budgeting Ins and Outs blog.

Review Your Credit Report
Buying a car is a significant purchase and best made when your credit score is solid, as your credit score influences the rate you’ll receive on your loan. The two biggest factors of your credit score are your payment history and how much you owe. Your payment history plays a big role in determining your FICO score, so it’s important to always pay your bills on time, every time. If you miss a payment, it can really drop your score, making it harder to get approved for loans and the interest rate will be potentially high which could cost you more money over time. The other significant factor in your FICO score is how much you owe. This is commonly known as utilization, sometimes called debt-to-credit ratio (the percentage of available credit you are using). For example, if your available credit is $1,000 and you owe $900, you’re using 90% of your available credit. If you’re using a large percentage of your available credit, it can adversely affect your credit score. Prior to applying for a loan, access your free credit report at annualcreditreport.com to review your credit accounts. Even if you’ve paid your bills as agreed, it’s still good to check to make sure everything is accurate. If you find any issues, you should dispute any incorrect errors. Any negative information on your credit report, such as late payments, delinquencies or judgments, will influence your ability to obtain a loan or a low interest rate. If your credit score is lower than you expected, send a dispute or update to the credit reporting agencies. It may take a few months to improve your credit score but the improvement could save you money each month because the better your score, the lower the interest rate on the auto loan.

Make a Down Payment or Trade-in
If you’re making a down payment or trading in your old car, you’ll reduce the amount of money borrowed. Cars are considered a depreciating asset, meaning they begin losing value as soon as you drive off the lot. There are advantages of making a down payment. With a smaller loan, you’ll pay interest on a lower balance, which means your total interest cost will be less.

Set a Purchase Price
When shopping for a car, pay attention to details rather than just the sticker price. In most states, you’ll have to pay sales tax and fees if you buy a new or used car. An easy way to estimate these extra expenses is to add 10% to the advertised price of the car. For example, if you see a car advertised for $30,000, you should assume your total price will be approximately $33,000. Once you know the monthly car payment you can afford, you can calculate how much you can afford to borrow for your car loan. Check out SDCCU’s Auto Payment Calculator to see what fits in your budget. Consider your budget and financial situation when deciding on what loan term length is right for you. If you prefer to save on the total amount you pay for a car, you may want to consider a shorter loan term or less expensive car. Longer finance periods reduce monthly payment amounts. However, a shorter loan term usually translates to a higher monthly payment but allows you to pay off the loan balance in fewer monthly payments. According to Nerd Wallet, the typical length of a car loan is close to six years.

Financing Options to Purchase a Car
There are several ways to finance a car purchase, including going through your bank, getting a loan from a dealership or using a third-party loan provider. Traditional lenders, like credit unions and banks, generally offer lower rates for car loans. San Diego County Credit Union offers new and used auto loans to get you in the vehicle that fits your lifestyle. Apply for a SDCCU auto loan before you start your vehicle shopping process. This can allow you to shop for your next vehicle more confidently, gives you more negotiating power with the dealer because you are pre-approved, and provides you with a better idea of your budget. When looking for auto loans in Southern California, SDCCU can provide you with flexible options.
Before making an investment in purchasing a car, carefully take the time to review your finances to see what you can afford. Do your future self a favor and make sure you can make the payments easily so you can live without stress for years to come. The feeling of purchasing your own car and driving it for the first time should feel special. Follow the above steps to make sure it is. Happy car shopping!

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184 monthly payments of $14.99 per $1,000 borrowed at 6.69% fixed APR on New Autos 2024 or newer. A minimum $25,000 loan amount is required for terms greater than 78 months.
290 days no payments is for qualified buyers and interest will accrue from date of contract.