Question: Can you afford to purchase a new car?
Another question: if you can indeed afford it, how much exactly can you afford? Which, in turn, pops up another question – What can you afford to pay per month?
Okay, answers now.
The first step is to assess your personal budget and determine what you can afford a month. There are many personal budgeting guides out there that will give you an idea of how much spare money you have each month. As a general rule of thumb, you should track every paisa you spend over a period of at least a month.
This will help determine where you really spend your money and how much you can afford. Take into consideration all basic necessities and set aside a certain portion for contingencies. You might be actually surprised to learn exactly where your money is going each month. And make slight adjustments to your spending patterns to ensure that you have a respectable amount that you can set aside.
Now work backwards from here.
Let’s assume that you can afford to pay Rs.10000 a month for that new car. Taking into calculation current interest rates offered on car loans, you can now calculate how much you can borrow.
If you can afford an EMI of Rs.10000, at an interest rate of 14% per annum for a 60-month loan, you are eligible for a loan of Rs. 4.29 lakh approximately.
You now know your upper limit for the car loan. If your EMI outlay per month is around 30-40% of your net take-home pay, you are home and dry. You can have that car and the cost will not play havoc with your monthly budget.
The above tips will help you to get an idea of the new car that you can afford. Loan amounts disbursed are totally at the discretion of the lender. If you have good credit history, lenders could finance 100% of the car cost.
Typically, you need to put up 10-15% of the cost of the car. In the above-mentioned scenario that would work to around Rs. 75000. Add this to the loan amount and the car you can afford is really over Rs. 5 lakh!
The author is a Relationship Manager working with the Mumbai-based SRE Financial Planners.