For most of us, cars are necessary but buying one is not always easy. And before you make a decision, it’s important to understand how much it will really cost you and how to budget for it. So, here are our top tips on how to budget for car payments.
Table of Contents
Calculate your income
First of all, make sure you calculate your take-home pay. We suggest dedicating 10%–15% of your income to your new car, including payment, insurance, and fuel. However, this is a general rule, you may have to budget less depending on your income and expenses. Also, you should calculate your debt. Having debt, such as student loans and credit card balances, can take a big chunk out of your income. Having lots of debt will definitely cut your budget.
Start with the 20/4/10 rule
The most common car budget rule is the 20/4/10 rule. According to this rule, with a 20% down payment and 4 years to pay the car loan, you can buy a car, provided that the monthly car payments do not exceed 10% of your income.
To break it down with a 20% down payment, you will be closer to paying off your car. Also, since you pay interest on each car payment you make, the longer the loan term, the more interest you will be paying – 4 years is considered a good benchmark.
Finally, for the best car you can afford, given your salary, your monthly payment should be less than 10-15% of your net pay after taxes. In addition to the 20/4/10 rule, many financial experts recommend keeping your car payment and all other automotive expenses under 20% of your take-home pay. The 20% includes your car payment, gas, oil changes, insurance, maintenance, and unexpected repairs, as we will see below.
Consider your expenses
A car’s price tag isn’t the only thing you pay when you buy one. We tend to budget for the total price of the vehicle, but when we do so, we forget to calculate other relevant costs like taxes, title and registration fees, interest on the loan and warranty. Here are some expenses to consider when buying a car.
Taxes and Fees
When you buy a car, the purchase price is only part of your total layout. Taxes on used cars are calculated by combining provincial and federal taxes. In Ontario, the HST is 13%. On a loan, the HST is added to the cost and financed in the loan. If you lease a car, you only pay the HST on each payment which saves paying interest on taxes. As well as that, If your vehicle was purchased privately, you will not pay the Harmonized Sales Tax (HST), but the Ontario government will still charge you a provincial retail sales tax (RST) of 13%.
The government believes this heightened tax rate helps maintain a “level playing field” for used car dealers, who must charge the HST. Regardless, either tax will be based on either the purchase price of the vehicle or the average wholesale value of the vehicle listed in the UVIP, whichever is greater and will be paid when you register the vehicle at the MTO.
Finally, you will need registration(licensing) fees which costs $59 for new plates or $32 to transfer your current plates.
FUEL
Your new car will require a monthly budget for fuel, and depending on the car you buy, you may need to spend more or less.
Repairs and Maintenance
Repairs and maintenance can be more expensive, depending on your car model. It is important that you maintain your car regularly and make sure it runs smoothly. Moreover, you should be prepared for any possible accidents or issues that could require the repair of your car. It is recommended to budget between $50-100 per month for maintenance.
Car insurance
Car insurance must be chosen carefully based on a number of factors. First of all, it's important to understand what your policy covers and your premiums, as sometimes paying annually is better than paying monthly. Your insurance company might offer you discounts if you meet the following criteria:
- Security systems
- Clean driving record
- Winter Tires
- Perfect payment history
Use a budgeting app
Manage your finances with a budgeting app once you’ve got a plan in place and take your credit from bad to good. This way, you can plan, monitor, and improve your finances with budgeting apps, especially if you have bad credit.
There are many budgeting apps to help you manage your money. You might want to check some of these apps out if you’d like to learn more about your finances or clear your debts.
Ask for professional help
The cost of owning a car doesn’t have to be a burden if you plan accordingly and do your research well. Even if you have a bad credit score, Legacy Auto can help you. So, if you have any questions about car finance in Ontario, do not hesitate to contact us.