According to the most recent State of the Automotive Finance Market study from Experian, the average new car loan surged to a shocking $30,534 during the first quarter of the year. Unfortunately, those purchasing new cars didn’t lower their expenses that much. The study noted that the average used car from a franchise set consumers back $20,904, whereas the price of the average used car purchased independently climbed to $16,612.
But what’s really astounding is how long people promised to pay their loans back. New car loans—for both new and used vehicles—lasted an average of almost 69 months, the report noted. Obviously, this is a lot of cash, and there are borrowers who can’t truly afford these loans.
If you’re getting ready to purchase a car and don’t want to overspend or borrow too much, here are seven tips that can help.
#1: Review Your Budget
Whether you plan to finance your car or pay entirely in cash, you need to make sure you understand the financial implications of the purchase. Figure out how the monthly payment will affect your monthly budget or how paying in cash might affect your finances over all.
If you’ve been paying a $400 or $500 monthly car payment all along, you might already know what you can handle. But if you’re financing a car for the first time, you’ll want to sit down and write out a budget and your expenses to gauge how much you can truly afford without forsaking your other financial goals.
If you’re paying for a car in cash, make sure you’re not depleting your emergency fund—and that you’re leaving enough money behind for your regular bills and living expenses.
#2: Consider the Interest Rate
While the total cost of your new or used car is a good place to start your comparison, you should also check to see what interest rate you qualify for. Generally speaking, the interest rate you qualify for will depend on the quality of your credit score. (You can view your free credit report at Credit.com to get a sense of how your credit score may affect your rates.)
And if you think it doesn’t matter, think again. Even a few percentage points can make a huge difference. If you borrow $25,000 at 8% APR, for example, you’ll pay $506.91 per month and incur a total loan cost of $30,414.59. If you take out the same loan but qualify for 4% APR, on the other hand, you’ll pay $460.41 per month and only $27,624.78 over the life of your loan.
#3: Don’t Forget about the Length of Your Loan
While it’s important to gauge the affordability of your new car’s payment and the interest rate you qualify for, don’t forget about the length of your loan. Taking out a longer loan can help you qualify for a lower payment, but you may pay a lot more interest due to the longer stretch of time it takes you to repay.
And if you need to borrow for longer than you really want, it might be worth asking yourself if you’re spending too much.
“If you must borrow money for a car, make sure it is an amount that can be paid off in three to four years and the payment will comfortably fit within your monthly budget,” says financial planner Matt Adams of Money Methods. “If you need to finance a vehicle for anything longer than four years to simply get the payment within reach, you are likely buying more vehicle than you should.”
#4: Remember the Higher Ongoing Costs of New Vehicles
In addition to the sticker price of vehicles you’re considering, it’s smart to look into other costs you might incur, says financial adviser Ryan Cravitz of Milestone Wealth Management.
“Make sure that you don’t forget to account for the many so-called hidden costs when buying a particular car,” he says. “Factors such as the cost of insuring the vehicle, the average maintenance and repair costs, the fuel economy ratings, and whether you should buy the extended warranty are just a few things that should not be ignored.”
Also, don’t forget that a lot of these costs can be higher if you purchase a new car right off the lot. Auto insurance rates in particular tend to be heftier than you might expect when you purchase a newer, more expensive vehicle.
#5: Ask Yourself about the Trade-Offs
Taking on a new car loan is often one of the easiest ways to get into the car you want. While it’s difficult and time-consuming to save up tens of thousands of dollars in a new car fund, you can visit a dealership, finance a car, and drive off the lot in a matter of hours.
Unfortunately, you’ll likely pay a pretty penny for the privilege. While you may theoretically be able to afford the payments on your new car, something usually has to give. And that something might be an expense you miss being able to afford like you were back in the days you didn’t have a huge car payment hanging over your head.
“Remember that whatever you spend on your car, that’s money you won’t have for clothes, food, or going out with your friends,” says financial adviser Anthony Montenegro of Blackmont Financial Advisors. “So, weigh out the trade-off carefully and spend wisely.”
#6: Set a Firm Limit and Consider Your Options
While any of the tips above can help you figure out how much you can afford to spend on your new ride, some financial advisers suggest simplifying the process with a firm limit.
For example, New York financial adviser Joseph Carbone of Focus Planning Group recommends that his clients never take out a car loan that exceeds 10% of their monthly income. “Of course, everyone’s situation is different,” he says. But this situation can truly work if you let it.
Let’s say your take-home pay is $4,500 per month. Using this rule, your car payment should come in under $450 per month. That may not be enough to get you into the car you want, but it’s enough to get you into the car you need.
Financial adviser Brian Hanks also suggests considering more than one car as you make your final selection.
“After you choose a model car you think you want, pick your second favorite,” says Hanks. “Compare the monthly costs of your first and second choice cars side by side. Without a tangible second choice to compare against, it’s too easy to justify higher monthly costs for your first choice.”
#7: Spend Less Than You Can Afford
If you’re still struggling to decide how much to spend—or you’re worried about overextending yourself—take a step back. Unless you need a new car today, there’s nothing wrong with thinking through your decision for weeks or months until you know exactly where you’re at.
And if you still can’t decide, try to err on the side of spending less than you can afford, says financial planner Mitchell Bloom of Bloom Financial, LLC. Bloom says he sees a lot of people who under-budget for and overspend on cars to the point where it puts them in financial peril. Fortunately, this situation is completely avoidable if you do some legwork.
The bottom line: Keep your expenses low, save as much as you can, and have a long-term plan. And if this advice doesn’t mesh with the car you want to buy, you’re probably spending too much.