(Not a) Free Ride — What car can you really afford?

April 2012 View more


It was a beautiful spring day 15 years ago and a great day for car shopping. I grabbed my two sons and headed to a dealership laden with Chevy Blazers—the model my oldest son pre-qualified as “awesome.” Hubby stayed home.

The salesman was polite, but eventually asked me what I could afford. When I hesitated, he said, “Ma’am why don’t you come back with your husband?” I never visited that dealership again. Still, I should have done some research on our own financial wherewithal and had it in hand. It’s easy to be taken by spit-polished cars under soft showroom lights, taking on more debt than is prudent.

Many dealerships offer an online calculator that may help you determine what you could afford on your next vehicle purchase. But beware that you can get into a fix by misunderstanding the difference between qualifying for a car loan and being able to afford that loan. “Qualifying” means you have satisfied the lender’s concerns about your means to repay it, but doesn’t take into account your total personal financial situation.

Even financial experts’ opinions vary widely on what’s ideal for car payments versus income. Some financial advisers recommend only eight percent of monthly gross income, while others say that you can spend up to 18 to 36 percent. That’s a huge range. First carefully review your total financial situation and choose the amount that makes sense for you.

Before you shop, consider the real cost of buying, owning, and operating your desired car/s over a five-year-period—the term of many loans these days—versus simply the monthly loan payment. The Edmunds.com True Cost to Own® calculator (www.edmunds.com/tco.html), includes costs you may not have considered— depreciation, interest on the loan, taxes and fees, insurance premiums, fuel costs, maintenance, and repairs. Simply punch in the make and model of the car and see an estimate of what you may really pay over 60 months. The car that looks like the cheaper option may, in fact, be more expensive than the higher-priced vehicle over time. Do your homework before entering the showroom or searching dealer inventory online.

Next, once you have a few car choices in mind, you can browse local dealers’ Internet pages to scout out available inventory. The Edmunds.com New Car Inventory tool offers the ability to cast a wider net by searching through the Edmunds.com network of participating dealers.

So, how do you finance your choice? You can finance a purchase through the dealership’s lending institution, with credit scores affecting your interest rate. Edmunds says a credit score of 720+ is considered excellent and gets you the best rates. A score of less than 620 is considered “subprime,” but higher rates will apply if a loan is granted. Get an online credit report from Experian, Equifax, and Trans Union so you know where you stand.

Another option is to lease a car—again, with credit score and length of the lease affecting price. Dealers shop for a lease with numerous banks, each offering different terms and conditions. Edmunds strongly recommends a three-year lease and suggests that you pay as little upfront as possible to start the lease, suggesting that you tell the dealer you want to pay “drive-off fees only.” Most auto lease contracts allow 12,000 miles per year, so if you drive more than this, have the lease written for 15,000 or 18,500 miles. These higher mileages raise your monthly payments, but save money in the long run.