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How Much Should You Spend On A New Car?

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How Much Should You Spend On A New Car?

It’s a matter of fact, while buying a car you are in drivers’ seat. So how will you manage to buy the car? On 6th Gear; that is one-time investment? Or on 1st Gear, by paying it off by EMIs?

Buying a car in US and buying a car in India has a huge difference. The question that arises is not why but how. If you are living in expensive cities like NYC or San Francisco, buying a car would be simply more than a burden.

A recent survey from interest.com founds that many middle income families purchase vehicles they cannot afford. What really comes in is doing smart work rather than doing hard work to get enough money for buying the car.

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The 50/50 rule to buy a Car

The rule is quite simple. If you are looking for buying a car, then allot no more than half of your yearly salary. Suppose you are getting 60,000$ annually. Then, your search should go around a range of 30,000$.

If you are one of those buying who doesn’t loves the EMI way, this method is highly suggested for them.

The 20/4/10 rule to control the buying expenses

If you are rather insisted in paying in EMIs rather than a one-term investment, then this is highly preferred for you.

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In brief:-

  • Lay down at least 20% of the total expense
  • Finance the vehicle for no more than 4 years
  • Keep your Total expenses under 10% of your income

The Debt Rule

Often people are not only are in burden of loans of car, but also other loans including mortgage and student loans. In that case, it is suggested that you should spend no more than 36% of monthly income for it. Let’s say you get 10,000$ per month with following debts in hand :

Mortgage: $2000

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Student loans: $500

Then you are paying $700 per month to cover debt which accounts 25% of debt. So you can spend another (36-25 = 11) 11% of your income on your car. Which is around $11, or your maximum monthly auto-loan expense.

 

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