How to Tell If You Can Afford to Buy a New Car

Buying a new car can be both exciting and terrifying. After all, the price of a new car can be a quarter of the price of a new home. And with so many different auto makers, it's difficult to make a decision of which car to buy.

Your first consideration might be why you're buying a new car. Some people enjoy the new technology, safety and reliability of a new car. For others, a new car is a sign of prestige or the image they like to uphold. And then there are those that enjoy the worry free years a good warranty will provide with a new car. On the other hand, you could save a good deal of money buying a slightly used car. Some used cars will still have a partial warranty that can be transferred to the new owner. The question is whether you can afford to buy a new car or not.

There are certain times in people's lives where buying a new car wouldn't be advised. You want to take a look at your job security. Do you feel like your current job will last another five years? You also want to examine your domestic situation. Is your marriage secure enough to buy a new car? In both situations, you want the answer to be a definite yes. You'll be financially responsible for five years of car payments and either one of these scenarios could hurt your credit if you weren't able to complete the payments.

Perhaps you're thinking about helping a son or daughter get their first car by co-signing with them on the financing. If they default on the car loan, you've either got another car for yourself or it goes against your credit as well as theirs.

It's estimated that, to finance a new car, you'll need 20% of your net income to make the payments. So, you'll need to sit down with a pad of paper with a pen and a calculator and do some math to figure your budget with a car payment added to it. Or better yet, take your net income, which is what you bring home after taxes for a month, and subtract all of your expenses. Can you make a car payment with what's left? Of course, this depends on the model and price of the vehicle your interested in buying. If your finances won't support the payment, you could shop for a cheaper car or consider a used car.

Another thing to keep in mind is car insurance. When a car is financed, the bank or lending institution will require you to have full coverage insurance on the vehicle to cover it's loss in case of an accident. That will have to be worked into the budget as well.

Having to pay out almost a quarter of your weekly paycheck to buy a new car shouldn't be a quick choice. If you're able to put a sizable down payment on the vehicle, you'll lower your monthly payments and make it easier to work into your budget. But you don't want to take on such a commitment if it will mean taking money out of the grocery fund.

*How Much Car Can You Afford?, Military.com