If you are in the market for a new car, your first step should be to carefully look at your budget. Whether you plan on applying for auto loans or paying with cold hard cash, you need to know how much car your budget can handle. There are advantages and disadvantages to both paying cash and financing, so you will need to determine what is best for your financial situation.
Paying cash for your new car, rather than relying on auto loans, can be a very smart move, particularly if you have saved funds for the purchase. Paying cash up front means you will have zero financing costs, zero monthly payments, zero credit risk, and no concerns about owing more than the car is worth as it depreciates. As a bonus, if you pay cash for a car, you will likely not get in over your head financially. The car will be yours. The title will be yours.
Before you decide how much cash you want to spend on the car, however, you should ask yourself what you are sacrificing in order to purchase that car with cash. Maybe you need to pay for new storm windows, so should buy a used car. Or perhaps it would be more advantageous to pay off your school loan in lieu of a new ride. Most people do not set aside "car money" in a jar on top of the fridge for years to save up. They will likely take money out of an investment fund, which may incur some fees. It is also possible that the cash you spend on that car could offer more investment opportunity elsewhere, particularly when you weigh it with some of the low rate auto loans dealerships are offering right now. But cash is simple. You will not take on debt to pay for that car and it will be yours the moment you drive it off the lot.
If you are looking at auto loans, the vital first step is identifying you financial ceiling for monthly payments. By looking at your overall spending each month, you can develop a budget. Start with your overall take home monthly salary. Then sum up all your mandatory expenses, such as mortgage payments or rent, student loan payments, utility bills and grocery bills. Subtract that total from your take home salary. Deduct your optional expenses next (pizza money, pedicures, movie tickets, golf membership, etc.) Make sure you also include the amount per month you presently or hope to set aside for savings and retirement. That remaining number is what you can afford on an auto loan payment, assuming there are no other big ticket items you plan to purchase within the time you anticipate having the auto loan. Keep in mind that you will need to make a down payment on the car, as well as pay for registration, inspection, license plates, fuel, upkeep and repairs. Most, if not all, of those expenses are dependent upon the type of vehicle you purchase and the purchase price. Thoroughly outline all the costs before you take on any auto loans.
Whether you plan to apply for auto loans or pay cash, know the maximum amount you can spend before you begin to look at cars. Do not veer from that course. Put it on a yellow sticky and put it in your wallet. Dealers always try to talk you up with fancy bells and whistles and what appear to be fantastic deals. You are responsible for making those payments, no matter how great the deal may seem at the time. Be true to yourself and do not spend beyond what makes you and your budget comfortable.