Planning the purchase of a car is something important, both to know how much our personal finances can cushion, since the car is a good that will lose value for a possible sale as soon as we release it.
Experts usually refer to 10% of income for the payment of the car as an optimal figure so that it does not entail large expenses. This means that if our net salary is 1,500 euros per month, we should not spend more than 150 euros on the car payment.
Next, do some research to find out what interest rate you are eligible for. This largely depends on your credit score, so it is different for everyone. But generally, the higher your credit score, the lower the interest rate you’ll get.
From there, you will have to decide the term, or duration, of the car loan. As of the second quarter of 2020, the average term for a new car loan is about 72 months, or six years. Car loans have been lengthening in recent years, and 72 and 84 month loans have replaced the more traditional 48 and 60 month ones, according to the Experian comparator.
How to calculate how much we can pay for the car
The more time we spend paying off the loan, the more we will end up paying in interest. This can throw off our budget, even if a longer loan reduces the monthly amount we pay.
Here is an example: Suppose you want to buy a car for 20,000 euros with an APR of 5% and no down payment. If we get a 60-month loan, the payment will be 377.42 euros per month. You can use this to see your case with specific figures.
It is a fairly high monthly fee, which, taking into account the 10% rule, would require a salary of more than 3,700 euros per month. Suppose you extend the loan to 84 months, or seven years, which reduces the monthly payment to about 280 euros per month.
And let’s not forget that the monthly payment is not everything. You also have to budget for insurance, gas, maintenance and other expenses.
You must take into account all these factors when calculating how much you are really going to spend on the car each month.
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