Making the decision to upgrade your vehicle is a big one. Because of their higher up-front price, many individuals will seek out financing to purchase a used vehicle so that they can conveniently pay for it in monthly installments. Before you start looking at cars, it’s a good plan to start by prepping your budget so that you can be assured that you can afford your new ride without straining yourself.

The 20% Take-Home Rule

It’s common financial advice that your total car expenses shouldn’t exceed 20% of your take-home pay. Keep in mind that this is your total car expenses, which include not only your monthly payment but all of the expenses that come along with owning a vehicle.

Expenses other than your monthly loan payment include fuel, maintenance, repair, insurance, and registration. It’s a good idea to total up the estimated costs of all of these expenses and deduct them from 20% of your take-home pay. This will give you a maximum loan payment amount that you can comfortably handle each month.

Figuring your monthly fuel expenses should be relatively simple by tracking your current car’s fuel expenses. If you don’t currently own a vehicle, consider totaling up the mileage for your day-to-day trips. Take this total and divide it by the miles per gallon that the vehicle you want has.

Next, multiply the remainder by the current fuel price per gallon to get a rough estimate of what your fuel expense will be per day. Lastly, multiply your daily expenses by 30 days, and you’ll have a good idea of what you’ll be spending on fuel to run your vehicle.

When it comes to estimating your vehicle maintenance and repair costs, AAA recommends setting aside $50 per month for each. That means that you’ll be setting aside $100 for vehicle maintenance and repairs. You can get a monthly insurance estimate from any auto insurance agency. Registration fees are discoverable at your state’s website and should be divided by 12 to get the monthly rate.

You’ll want to total up the entire monthly costs of your fuel, maintenance, repairs, insurance, and registration fees. Take this amount and subtract it from 20% of your take-home pay. This will provide you with the maximum amount that your car payment may be to stay within your budget.

The 20% Down Payment Rule

Whenever you purchase a used vehicle, you should strongly consider putting a down payment on your vehicle loan. This will help secure a lower interest rate on your loan and reduce your overall monthly payment because you’ll come across as less risky to potential lenders. A good rule of thumb is to give your auto lender a down payment equal to at least 20% of the purchase price of your used vehicle.

For example, let’s say that your new ride costs $20,000. You’ll take the purchase price of the car, in this case $20,000, and multiply it by 20%. This gives you a total required down payment of at least $4,000. If you have an existing vehicle that you’re considering trading in, you can utilize that money to pay for the down payment of the car that you purchase. You can also look up your car online to see what the current market value is for a trade-in.

The 36% Debt Load

It’s never a good idea to take on a new auto loan that puts an untenable strain on your budget. To ensure that you have enough room in your budget to not only cover all of your bills but also enjoy a little extra, you’ll want to follow the 36% debt load rule. This rule states that all of your fixed expenses shouldn’t exceed 36% of your take-home income.

When determining your total monthly debt load, you’ll want to include your mortgage, credit cards, and any loans that you have. Figure out 40% of your take-home pay and subtract your existing total monthly debt load. This will reveal how much money you have left to spend on your auto-related expenses. It’s important to remember that your auto expenses include not only your car payment but things like registration, fuel, and insurance costs.

Get a Loan Pre-Approval

One of the best things that you can do to help ensure that you’re budgeting correctly for your new vehicle purchase is to obtain a loan pre approval. This will allow you to verify that your credit is high enough to get approved for an auto loan of the amount that you desire.

Additionally, the lender will be able to provide you with an estimated interest rate on your loan. This is going to have a big impact on what your monthly car payment will be for your new auto loan. Having this information will further help you plan your budget.

Use a Payment Calculator to Determine Your Loan Term

There are a plethora of online car payment calculators that you can utilize to mock up what your monthly payment will be. You’ll need to insert information like the purchase price, down payment, interest rate, and loan term. It can help to play around with some of these numbers to determine how they affect your total monthly payment.

One number that you’ll want to play around with is your loan term. Some experts suggest that it is ill-advised to take on a car loan with a term longer than 48 months. The longer your loan term is, the more you can expect to pay in interest on the loan. However, your monthly payment amount will be lower because the loan amount is spread out over more time. By using an online auto calculator, you can see how much interest you’ll be paying over the life of your loan as well as how it changes based on your chosen loan term.

Decide on Saving Money or Getting a Loan Payment

Once you go through the steps above, you should have a fairly decent idea of how much you can afford to put toward a car payment each month. As you’re looking through the used car market, you can get a good idea of how much a vehicle that you want will cost. Now, it’s time to determine whether you want to save up the cash to buy it or take out an auto loan.

There are a few general rules of thumb that you can easily follow to determine what the best option is for you. If the suggested 20% down payment is equal to or near the total cost of the vehicle, then you’re better off buying it in cash. If the total cost of the vehicle is equal to or near the sum of your estimated monthly payments for up to two years, then it’s likely more advantageous that you save the money each month and purchase the car in cash. This will save you a lot of money on interest expenses that will be charged by an auto loan lender.

Following the above tips can help you put together a budget to help you with your next used car purchase.