Vehicle Affordability Considerations

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Whether you choose to buy a new or used car or other vehicle, you want to determine how much of a car you can afford.

Buying a car means having to pay for it in one of several ways. You can pay cash, take out a loan, or lease a vehicle. You may also trade in the vehicle (called a trade-in) you currently own to the auto dealer, who will assign a trade-in value and apply it toward the purchase price of the replacement car. Generally, the dealer bases the trade-in value on the vehicle's blue-book value.

Even if you trade in your vehicle, a dealer or other lender may still require you to make a cash down payment, depending on your credit history and their willingness to bargain.

Affording a car involves more than just paying to buy it. As the owner, you face insurance and registration expenses, as well as maintenance expenses to keep it running and pass any state emission tests. (As lessee, you generally don't pay some of these operating costs.) These costs can easily exceed $1,000 or $2,000 a year. You'll face other costs to operate the vehicle, including cleaning, fuel and parking.

Unless you use rail, bus or an alternative transit system, or simply choose to walk, owning a car is often a necessity in American society. Doing a cost-benefit analysis is useful when buying a car. Determining your affordability is a good first step in that analysis.

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