Figuring out what you can afford isn’t as easy as looking at your bank account balance. Fortunately, calculating your finances is made simpler with help ranging from advice blogs and online tools. Jessica Moorhouse, owner of Mo’ Money Mo’ Houses, personal finance expert, blogger and podcaster, sat down with us to discuss the different factors that affect the affordability of a new car. Here they go:
1. Your Down Payment
When tackling the challenge of finding out how big a down payment should be (for any large purchase, like a car or home), Jessica says that she uses “free online payment and mortgage calculators” and was able to find out “how much she could afford for a house and how much she was comfortable paying every month” with very little fuss or headache finance usual elicits. It’s worth noting that she went with a 20-per-cent down payment for her mortgage to avoid mortgage insurance, which you pay into every month if your down payment is less than 20 per cent.
We offer a payment calculator on our very website, which allows customers to find out their down payment and monthly payments, while providing our exclusive pricing data. You can check it out right here.
2. Your Ability to Afford Financing/Leasing
Loans are sometimes a necessity, even the ones that last 84 months or longer, but Jessica says that she’s “always been of the mind that you shouldn’t get a long loan if you can help it.” She suggests taking a few more years to save up and buy a car outright with cash, or taking a small loan you can pay off quickly. Debt is never fun, and if you have to compromise the kind of lifestyle and things you have, you’ll be better off.
The biggest question that a lot of new car buyers have is to lease or to buy. Jessica’s perspective on whether or not leasing is worth it might help you decide. She says that leasing is “essentially paying money towards a car that you will never have full ownership of,” but if you do buy a car, “it will depreciate in value the longer you have it.” So, she says that it really depends on whether you want to exchange the car later or plan on driving it for the next 20 years.
3. Your Savings
Knowing your down payment and monthly payments is only the start of the process, though, and Jessica’s suggestion for saving up is that “starting early is always key.” She’s aware that it’s not an easy task, especially as a student or graduate in the recession, but once you have your final number, she says to “calculate how long it will take to save that amount, then do automatic deposits into your savings account.” It takes the hassle out of trying to recalculate, but you do have to stick to your numbers if you want to reach your goals within your timeframe.
Having automatic deposits paying into your future down payment is great, but it does put a cap on your funds, especially on top of regular savings, bills and emergencies. Monthly loan and lease payments can be another headache, and though Jessica says that she’s lucky not to have loans, she notes that it was a choice. Forgoing luxuries and what others may consider necessities, she cuts costs by taking public transportation, while her husband made sacrifices and worked extra hours to afford his lease on his new car.
4. Your Emergency Funds
Owning a car means emergency expenses crop up time from time, usually when you least expect it. So, what does Jessica recommend doing to deal with emergencies like repairs and maintenance? An emergency fund. She puts a percentage of her paycheque into her emergency savings account until she reaches $10,000, an amount she feels comfortable with. She says that with this fund, “if an unexpected expense does come up, [she’s] got the cash to pay for it and [doesn’t] have to rely on credit.” But, she notes, it’s important to replace what you take out, so you “always have a buffer moving forward.”
5. Your Reasoning for Buying a Car
We all have that dream car in mind, and even back up dream cars, but before you ask how much you can afford for a car, Jessica suggests asking “what do you need a car for?” She notes that it’s worth reconsidering if it’s just to “drive around the city a few days a week to do chores,” rather than commute every day for over an hour.
Another factor she says to include is your family size, such as needing more space for kids. Once you’ve got that figured out, Jessica says that the next step is “poring over reviews to see what car has the best track record, is good on gas, and won’t cost an arm and a leg in car insurance.” Her final tip touches on the dealership and that’s to “have what you want written down.” It’ll help you avoid being upsold on extra features like heated seats and tinted windows, and that’s money that can go directly back into your savings.
Even though there are a lot of factors to consider in buying a new car, they are important questions that reflect lifestyle choices and changes. With Jessica Moorhouse’s advice and some hard decisions, you can be better armed before you step into a dealership.