The smart thing to do is to spend less than 10% of your monthly take-home pay on your car payment. But, there is a balanced approach you could use to afford a better car.

Balance Budgets, Life, and Payments

Keep 50% of your monthly take-home for basic needs like housing, food, and transportation. This will include your monthly car payment, and any other car-related expenses. Use 30% of your income for entertainment, travel, and other non-essential things. The final 20%, you should keep in savings to pay off credit cards and meeting long-term financial goals. If you want a more expensive car, put your car payments in the 30% ‘wants’ category but keep your budget balanced.

Other Expenses Exist

You won’t only be paying for your car every month. There are also other car-related expenses like insurance, gas, repairs, maintenance, parking, and tolls. Overall, your car-related costs should not cross 15% to 20% of your take-home pay. So if your car payment is 10% of your take-home pay, keep another 5% for expenses.

Costly Mistakes

Once you’ve figured out the payment amount you can afford, consider all the factors that count towards it. These include the loan amount, the annual percentage rate (APR), which includes the interest rate, and the length of the loan. Remember, the APR and the term of the loan need to be as low as possible. So a lower APR percentage and a loan term between 36-48 months are ideal. Never go beyond 60 months. It could save you thousands. The longer your term, the more interest you will end up paying over time. Your credit score matters too. The higher your score, the better your loan terms will be. So you may also want to consider working on improving your credit score for a few months before applying for a loan.

Find Balance

As long as you remain aware of what you can afford, and how it fits into your budget, you will have all the tools necessary to negotiate a good deal. Financial experts always recommend economizing when it comes to automotive expenses, but if your car matters to you, you should go for it. Just don’t let it imbalance your total budget.