Building Your Vehicle Budget

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Building Your Vehicle Budget

Responsibilities of owning a vehicle

Owning a vehicle is a big responsibility. Although we associate it with freedom, many older people joke that their cars actually own them. They have to make payments on it, they have to pay for insurance, they have gas prices to worry about, and they must worry about getting into accidents. And then there is the looming threat of big repairs. If the engine dies, do you have $2,000 sitting around to fix it?

Budget accordingly

Most people will set aside money every month to pay for a vehicle, whether it is to buy it in one lump sum or to pay off a loan over time. How much can you afford to pay for a new car, truck, minivan, or other vehicle? Factor that in so that you don’t get sold on something you can’t afford. A dealer will ask you how much you can afford so that he or she knows what to offer you. Having a specific number handy can help you when it comes time to negotiate with a dealer. Will you be buying with a lump sum, or do you need to take out a loan? The answers to these questions will influence your budget.

A popular recommendation is that your total monthly car payments should not exceed 20% of your take-home pay.

Sources of financing for a vehicle

You have many sources at your disposal.

The dealer. Many car buyers finance their purchases through their car dealer, who has access to loans offered by a number of finance companies, banks, and savings and loans. Generally, when you buy a car, the salesperson will ask you if you plan to finance your purchase, how much you plan to provide as a down payment, and what type of monthly payment you can afford. The major benefit of going through the dealer is convenience, as you can buy a car and finance it in one stop. The major disadvantage is that the terms of the loan may not be as favorable as you can get elsewhere.

Your bank or credit union. Borrowing from a financial institution, whether a physical one or an online one, is another option. Before you fill out a loan application, check and compare rates for loans at various banks or credit unions. Once you find the financial institution with the best terms for the type of loan you want, you can apply for the loan either before or after you’ve found the car you want to buy. By applying before you find a car, you can get pre-approved for a loan, leaving you in a strong position when negotiating a price on the car you want to buy at a car dealership.

Estimate ongoing costs for insurance, gas and maintenance

Your budget should include money set aside for regular expenses. That means insurance payments (which you can pay once every three months, six months, or year if you want), gas, regular maintenance like oil changes and tire rotations, annual license renewal, and unexpected repairs. Once you have owned a car for a while, you can estimate all but the unexpected repairs and budget them as needed. For the unexpected repairs, it is a good idea to set up a separate fund at your bank or credit union and add to it every month so that you will breathe easily when a big repair comes.