Car shopping? 7 questions to determine what you can afford

But easy to answer? Not so much — especially with the average price of a car at $38,000 according to Kelley Blue Book. Gulp.

Rule-of-thumb advice on how much car you can afford is everywhere. It’s typical to hear that:

You should spend no more than 20% of your take-home pay on all car expenses.

Your down payment should be 20% of the car’s value.

A car affordability calculator will help you calculate scenarios based on down payment, trade-in value, and loan amount.

Financial advisors caution not to rely on these tools alone, which don’t take into account things like car insurance, your credit score, and what funds you have access to.

“I generally think those rules of thumb will often lead to more spending in the long run,” says H. Jude Boudreaux, a certified financial planner from New Orleans, who learned a thing or two from a dad who ran a car dealership.

Patricia D. Hausknost, a certified financial planner in Long Beach, California, agrees that the commonly-used guidelines go only so far. She jokes about saying “it depends” after each car-buying question she fields — but it’s an answer she sticks by.

“It depends on what your personal financial situation is like. You really have to look at your own situation and figure out, ‘What can I do and what’s best for me?’ ”

With apologies to anyone who wants to test-drive now and ask questions later, here are seven questions financial advisors suggest you ask yourself before deciding how much car you can afford

1. What’s driving my car decision?

Is it time to replace your “beater” with another car you can drive into the ground? Do you need something more reliable for the cold-weather climate you’ve just moved to? Or do you want to buy something more fuel-efficient?

Knowing why you’re shopping for a new car will put other decisions into focus, such as new or used, lease or loan.

And don’t forget to consider the future, says Hausknost.

“How has your life changed and is it expected to stay that way in the foreseeable future?” The pandemic’s shift to work-from-home might shift your car-payment priorities, for instance. A growing family or looming retirement are typical considerations.

But enough with the boring practicalities. What if you just love that new-car smell and want a change? That’s OK, just make sure you move on to the next questions. If the math works out, go for it!

2. Do I have a handle on my cash flow?

Crunch the numbers. Know what you’ve got coming in (earnings) and what’s going out (spending). Hopefully you’ll have money left over for a new car. This information will guide you through the next questions as you think about your monthly payment, your loan term, and other factors.

3. What can I bring to the negotiation table?

If you have cash on hand, know how much you’re ready to part with. Do you have enough to pay cash up front for a decent used car? Would you rather make a sizable down payment on a new vehicle? Remember that cash up front can help you negotiate a discount, says Boudreaux.

If you have a trade-in, use an online value estimator like the one from Kelley Blue Book to find its value before you negotiate.

4. How much debt can i handle?

Those rules of thumb we mentioned? If you’re thinking of a car loan, they’re a place to start. Bob DiDonato, an advisor with Ameriprise Financial Services in Brookfield, Wisconsin, uses these two:

A car’s value should be no more than a third of your annual gross income.

Car loan payments should be no more than 10% of your monthly take home pay.

“It’s a gut check,” DiDonato says. “At the end of the day everyone’s situation is different.”

Are those guidelines a stretch for you, or can you stretch the guidelines? To find out, here’s what DiDonato and others ask their car-buying clients to consider:

Any other debt you have.

Your cash flow (see Question No. 2).

Anticipated expenses looming.

How much cash you have in an emergency fund.

Your credit score, which determines the interest rate on your loan.

The better your credit score, the better your terms of your car loan — which will save you money. If you have no credit or a low score, it might be worth a higher interest rate to establish credit or improve your score.

Boudreaux picked up this tip watching his father sell cars: Don’t think only about your monthly car payment.

“That’s a very deceptive number, because there are all kinds of ways for dealerships to structure a transaction that will lead you to that number.” His advice is to negotiate price first and negotiate the terms second.

DiDonato adds one last question: “The really big one is what level of debt are you emotionally comfortable with?” If your car debt is keeping you up at night, it’s probably time to recalculate.

5. What are the “hidden” car costs?

What new or increased expenses will come with your new car? That’s on DiDonato’s hit parade of car-purchase questions. And don’t get surprised by add-ons at purchase time. Here’s what to get a handle on:

Car insurance rates. Whether new, used or leased, the premiums for your new car could be higher than what you’re paying now. Call your agent or visit an auto insurance website to find out.

Maintenance costs. Do some Googling to learn about typical maintenance costs for the car you’re considering (Kelley Blue Book has an estimator). Some cars require pricier grades of oil and fuel. The EPA has a website that lets you research fuel costs for specific vehicles by make, model and year.

Sales tax and fees. These vary by state. You can do research through your state motor vehicle website or add 10% to the car price for a ballpark idea.

State fees associated with titles, licensing, and registration. These will vary by state and type of transaction.

6. Have I considered alternatives to a brand new car?

The more flexible you are about your car choices, the more likely you’ll hit your spending target. “The hardest thing is not to become emotionally attached to one car,” says Boudreaux. You’ll save money if you’re willing to consider options such as used and leased vehicles. Along with your answers to Question #1, advisors offer these considerations.

If shopping for a leased car:

You can get more car for your money with a lease because the lease payment “is going to be relatively low relative to the value of the car,” Hausknost says.

What’s the maintenance plan? Some leases include service agreements that can save you money and hassles.

Most car leases are based on 12,000 miles per year, with extra fees assessed if you surpass the limit.

This might not be for you if you like to drive one car for many years or don’t want a monthly payment forever.

Remember: When the car lease is up you will have the option to buy at a price stipulated in your contract. If you’re considering this, do your research to make sure the price is a fair one.

If shopping for a used car:

A used car will depreciate more quickly, meaning less value when you decide to sell or trade in.

You will likely have more maintenance costs. Consider an extended warranty if you want to avoid surprises.

Previously leased cars can be a good bargain, especially if you shop around.

If financing, a used car will tend to mean a higher interest rate. But the lower cost means your down-payment can be lower, too.

7. Final check: Am I being realistic?

It’s a common mistake for car shoppers to be unrealistic about the impact of monthly car payments or a cash outlay, says DiDonato.

“Some analysis needs to be done in most scenarios,” he says. How much car you can afford “can’t just be a fly-by-night decision.”

Talking things over with a trusted friend, family member, or financial advisor can be helpful. Keep in mind other goals you have, such as saving for a house, vacation, retirement, or a child’s education.

Will these goals be hindered by your monthly car payment? And make sure you have a clear picture of your job security and your spending habits.

“A new car is a very emotional decision,” says Hausknost. “Let your head and not your heart guide you!”

Diane M. Bacha is a Wisconsin writer, editor, and communications professional with experience in newspapers, magazines, books, websites and nonprofits. She is a contributor to The Penny Hoarder.

This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.