Small Business Guides

How to Determine if You Can Afford the Car You Want

When it comes to buying expensive items like cars, the average consumer doesn’t know where to begin to understand whether or not the item is affordable. In many cases, a car dealer might sell you a car, even if the payments are too much to handle. Figuring out if this is the right deal for you is more than looking at the monthly payment and thinking, “Yeah, I can probably afford that month after month.” In reality, things are a little bit more complicated than that.

First, there’s the interest rate and fees. Together, these two numbers form your APR, or Annual Percentage Rate. The APR is the extra money you pay each month in exchange for the right to use a lender’s money. APR isn’t just a way for lenders to make profit. Most of the money is used to make up for the times that borrowers default on loans. Some borrowers might miss a payment here and there, paying it back when they have the money. Other borrowers can default on the loan entirely.

You don’t want to default on the loan. Not only could it result in your car being repossessed, breaking your contract will kill your credit. Because you likely won’t be able to afford to repay the loan even well after the fact (why else would you have defaulted in the first place?), that negative mark will sit in your credit history for seven whole years before it disappears and finally lets your credit score start to recover.

So when it comes to evaluating Missouri Title Loans, pay attention to the APR, not just the monthly payment. High interest loans cost more than low interest loans. This isn’t necessarily a bad thing; you should just be aware of what you’re getting into. In the event that you start missing payments, the debt will grow very quickly, so you should be sure that you can afford the monthly payments with room to spare.

This is where it becomes useful to understand your debt to income ratio. Your debt to income ratio should never go over 40% if you can possibly help it. This means that if you have an income of $4000 per month, you wouldn’t want all of your monthly debt payments to exceed $1600 per month.

Budgeting is an important part of bringing into your life any new monthly payment. You should understand what you pay monthly in utilities, rent/mortgage, groceries, debt costs, and other expenses. Your debt-to-income ratio will only include the debts, so it’s up to you to understand what else you pay for everything else in your life.

If, when you’ve done all of this, you still have plenty of money to spare, you can probably afford the car you’re considering without trouble. It’s important not to take on as much debt as you could possibly handle, because if a financial emergency happened, you would find yourself suddenly unable to pay. Think carefully and make the right decision. You’ll be glad you took the time and effort.