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How Much Car Can You Really Afford? (Car Loan Basics)

How Much Car Can You Really Afford? (Car Loan Basics)


owning a car is most likely the second
most expensive thing in your entire life next to a house so it’s probably a good
idea that you make sure that you can actually afford the car that you’re
buying because they can get really expensive if you’re not paying attention
so in this video I’m gonna explain exactly how much car you can really
afford with just some basic information and some basic math so that you guys can
plug in your own numbers and find out for yourself if you can afford the car
or if you can’t now if you just found this channel i’m jason with honest
finance and i make a lot of videos on different topics that will give your
life and your finances more value so if you guys are interested in that type of
content feel free to subscribe but for now let’s just start talking about how
much car you can really afford before I get into everything I want to quickly
address some averages that I found online when it comes to car payments and
car loans because these are the averages of what everybody else is paying and
these are not very good numbers because everybody is apparently buying way too
much car compared to the income that they’re actually making so according to
some quick research I found that the average car loan is for about $30,000
with an interest rate of about 6% and then the average term is for about 66
months which is five and a half years and those are really bad numbers
considering that the average household income in the u.s. right now is $45,000
a year so when you run those numbers on a loan calculator you’ll actually find
that the average car payment is going to be about five hundred and thirty-five
dollars a month and that is extremely high when you consider like I just said
the average u.s. salary is just $45,000 a year and then the part that bothers me
the most about these terrible averages is that you’re actually going to be
paying about fifty three hundred bucks an interest on that loan and that is a
lot of money just to be wasting on interest now I’m not opposed to having a
car loan but I would prefer that you pay cash for your car but if you are gonna
get a loan just follow these three steps that I’m gonna lay out right here and
this is gonna teach you exactly how much car you can afford
according to just this basic information that I’m gonna give you okay so the
first step I want to talk about is the fact that you need at least 20% down on
your car loan and this is going to prevent you from going upside down in
your car most likely and then it’s also going to help keep your payment’s a
little bit lower because you have such a hefty
downpayment and keep in mind that when you put 20% down in your car loan you’re
also most likely to get the best rates from the banks as well so always make it
a priority to put at least 20% down on your car I know that’s gonna take a
while to save up in some cases but it is something you definitely need to be
doing now the next step is that you should only finance your car for a
maximum of 60 months which is gonna be five years and I don’t want you doing
anything higher than that so if you’re looking at a 72 or an 84 month loan do
not do those loans only stick with 60 months or lower and I would prefer it if
you guys can stick with about a 36 to a 48 month loan that way you can get your
car paid off a lot faster but at the most just stick with 60 months or less
and you’re good to go and also when it comes to the length of the loan pay
attention to the interest rate as well because if you’re looking at a 60 month
loan with a 5% interest rate but then you look at a 36 month loan and it has a
three and a half percent rate then for sure try to go with a three and a half
percent rate with a different term because that’s gonna save you a lot of
money on interest and that’s gonna be a better value for you overall now the
last step is that your total associated car payment shouldn’t exceed ten percent
of your net take-home pay and I’ll explain how that works right here so if
you make thirty five thousand dollars a year after taxes then just take that
money and divide it by 12 months and you’re gonna get twenty nine hundred
bucks a month and that’s how much money you have coming in so that means that
ten percent of that is gonna be two hundred ninety bucks a month that you
can use towards a car payment but just make sure that you’re also including all
the associated car costs as well because those need to be included in the ten
percent so if you’ve got car insurance registration maintenance and all that
other kind of stuff associated with owning the car then for sure add that in
as part of the ten percent of your net income because that is associated with
owning the car so if you added up all of the associated costs and let’s say that
they added up to a hundred bucks a month then if you are only allowed to have two
hundred and ninety bucks as part of your car payment then your car payment needs
to be a hundred and ninety and then your associated cost would be a hundred and
that would be what you can actually afford based on the thirty five thousand
dollar net salary now if you guys have made it this far into the video can you
please just give it a big thumbs up if you’re liking what I’m
talking about that way I can actually tell if I need to make more content like
this or not so thank you very much now let’s go for an example here so that I
can show you guys the three steps in action so that you can make sense of
everything that I’ve just talked about so for example let’s say that Joe wants
to buy a twenty thousand dollar car and he makes $50,000 a year net and then
he’s gonna get a four percent interest rate from the credit union because he
has good credit well the first thing he’s gonna need to do is come up with 20
percent down which is gonna be four thousand dollars so he’s gonna end up
financing sixteen thousand dollars at four percent interest and then let’s do
a 60-month loan and that is gonna make his payment about three hundred bucks a
month now his net income of fifty thousand dollars is gonna bring him in
four thousand one hundred and sixty six dollars per month so that means he can
afford a four hundred and sixteen dollar total car payment and remember that’s
including all of the associated car costs as well so if 10% of his take-home
pay is four hundred and sixteen dollars a month and his car payment is looking
to be about three hundred bucks a month then as long as the associated costs are
about a hundred then I could say that he can afford that car and he should go
ahead and do it so just remember the three steps which are that you need 20%
down and then don’t ever exceed 60 months as a car loan and then just make
sure that you’re only spending about ten percent of your net income as far as all
of your associated car cost go including the car payment and all of the other
things and as long as you’re not exceeding ten percent then just run
those same numbers and you can find out if you can afford the car or not cars
are always going to be depreciating assets so just remember that you always
want to get the best value when you’re buying them and when you’re financing
them so that you don’t end up spending all of your money on a stupid car that’s
just losing money because that’s just inevitable once again I’m Jason with
honest finance and I make a lot of videos on different topics that will
give your life and your finances more value so if you guys do find an interest
in that type of content feel free to subscribe but for now I’m just gonna put
up some other car loan videos that you guys can learn about the math side of
things you guys can watch those or just move on but thank you for your time

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19 thoughts on “How Much Car Can You Really Afford? (Car Loan Basics)

  1. Been watching your videos for awhile now. Info is gold and straight to the point. These types of videos are what the internet should be, guides to help people navigate correctly through life without having to make costly financial mistakes.

  2. Car loan is the worst investment you can get yourself into. Just save up and buy yourself a good beater that runs and drives great. Don't worry about what people think about you for the 5 seconds you spend at the stop light.

  3. This is impossible in Michigan. Full coverage alone on a car with a lien will annihilate your 290/month allowance.

  4. Great advice terrible example 50k net is about 65 gross and to buy a 20k car new is a lower end model smaller car to midsize car i think your 100$ in maintenance a month is way too high for a new car unless your setting aside for new tires every 12-16 months.

  5. What about cleaning up your credit b4 buying a vehicle to get those low interest rates? Should I get a credit repair guy to do that?

  6. I had absolutely no clue what you were talking about but I like the tips I'll have my boyfriend watch it and explain it to me lml

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