The problem with asking how much car I can afford is that it sets your expectations at the very limit of what you can manage. It also gives the salesperson an idea of how much useless features and add-ons they can sell you!
To really know how much you should spend on a car, you need to know how much it’s really going to cost. 1. Sales tax, registration and dealer documentation costs usually add as much as 10% to the price you agree on.
2. The car the dealer shows you is always going to include all the features but the price quoted will be for a base, no-frills model. Make sure to ask how much the price increases for all those extras. 3. Monthly cost for gas, insurance and maintenance can be as much as your payment.
Car dealers have gotten sneaky over the past few years. Since worker wages have barely budged while car prices have increased, dealers are offering longer-term loans to make the monthly payments look more reasonable.
On a $17,500 car loan and a 3.5% rate, the monthly payment would be $513 on a 36-month loan and you would end up paying almost $1,000 in interest. Extending the loan out to 60-months will decrease the payment to $318 a month but you’ll end up paying $1,602 in interest.
If a dealer sells you more car than you can afford, collects a year or two in payments and then repossesses the car – he can turn around and resell it to another customer.