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How to calculate an affordable car loan

How to calculate an affordable car loan

Buying a new car is an exciting time. Sometimes so exciting that it is easy to get carried away and spend more than you planned for. That’s fine if you’re buying cash, but if you are borrowing to finance the car, that can lead you into difficulty. Car loans are fixed borrowing with little flexibility so you need to get it right first time to get the best out of it.

Assessing the affordability of your car loan can make or break your experience so it is something ideally done ahead of time. Here’s how.

Calculating affordability

Despite the importance of calculating the affordability of a car loan, there is no single way of doing it. You can calculate it in your own way or use the popular 50-30-20 calculation.

Car loan calculation

If you have a car loan already, assessing affordability should be easy. Take how much your monthly payment is now, assess how easy it has been to pay it off so far and adjust the next loan to match. If you found it easy to pay off the loan each month, you could afford to borrow more if you needed to. If you found it a challenge to meet those monthly payments, you should ideally borrow less this time round.

Add in any future lifestyle changes you are planning such as children, house or career moves and come up with a figure that way.

50-30-20

The 50-30-20 calculation is a popular way to give yourself a rough idea of how much of a car loan you can afford. The figure is a percentage, 50% of your take-home salary for mortgage/rent/bills and essentials, 30% for things you want for the month, such as going out, new clothes and so on. The final 20% is for savings as this is the ideal amount we put away each month.

The car loan should utilize any remaining from the 50% for essentials as transport is an essential. If you have spare from the 30% portion or are prepared to go out less, eat out less or buy fewer clothes over the period of the loan, you can take from there too. The end result should be a monthly payment you can comfortably afford over the long term.

Don’t forget the expenses

Before allocating all that spare money to the car loan, remember to include gas, insurance, tires and servicing into the mix. If you’re buying a new car, servicing may be included. Insurance is mandatory, gas is essential and tires depend on how and how far you drive.

If you need help with assessing car loans or have already found the car you want, visit Car Nation Canada. We can help with every aspect of buying a new car and securing a great deal on a car loan.

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