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How Much Car Can You Afford?

It finally happened. Your old car - the one you had decided you would keep until it literally fell apart - has finally bit the dust. Or maybe you've decided the time is right to upgrade to an SUV to help get you through those rough winters.

No matter what your reasons, if you've found yourself in the market for a new or used vehicle, then one of the first steps in the process is to decide how much vehicle you can afford.

There are financial rules about how to know if you can afford many things. Rent on a place to live should be no more than one week's paycheck. A monthly mortgage payment should be no more than 20 percent of your salary after taxes.

A similar rule applies to knowing just how much you can afford when it comes to purchasing a new or used vehicle. Financial experts have suggested that no more than 20 percent of your monthly income after taxes be spent on an auto payment. That includes factoring in the purchase price, any down payment you are able to make, and the interest rate and term of the loan.

Estimating your monthly payments, based on the purchase price, down payment and financing options, also is important. If interest rates are low, it allows for buyers to get more for their money. However, if you have less than stellar credit, it will affect the kind of interest rate you receive on any loan. If you are subject to a higher interest rate, it would be wise to seek out a less-expensive vehicle to offset the larger interest amount you'll be paying.

One of the best ways to lower your monthly payment and get a lower interest rate is to put a significant chunk of money down on the vehicle you wish to purchase. If it is in your budget, try to put down at least 10 percent of the vehicle's purchase price in the form of a down payment. The higher the down payment is, the lower the monthly payment will be, which can increase your ability to pay off the loan sooner.

Another very important factor to consider is the maintenance costs for the vehicle you will be purchasing. Most brand new vehicles come equipped with three year or 36,000 mile warranties at a minimum. A few car dealers will offer warranties on the power train that can extend to 60,000 miles or more. These warranties only cover the cost of repair work, and not the annual maintenance that is a part of owning a vehicle. Annual maintenance items include oil changes, tire rotations, replacing tires and flushing/filling various fluids in your vehicle. The average vehicle owner spends 1.5 percent of their annual income on vehicle maintenance each year. Be sure to factor that in when determining if a particular model is affordable for you.

Last but not least are the costs to fuel and insure your vehicle. With gas prices currently at $4 or more a gallon in the U.S., many consumers are purchasing smaller, more fuel-efficient vehicles. According to information collected by AAA, the average cost of fueling a small sedan annually is $6,735. SUVs and large sedans were the least fuel efficient, costing between $8,000 and $11,000 annually to fuel.

Vehicle insurance also is an important factor in the affordability of any vehicle. Newer models always cost more to insure than used vehicles. Insurance rates also will depend on the number of miles you anticipate driving annually, and whether you drive in a high-risk area for automobile accidents.

Once you have factored in all of these items, you will have a decent idea of just how much car you can afford.

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