The dealer approved me for $650 a month. Can I afford it?

The question

An illustrative letter.

The answer

My dear, I am sorry about your old car. Losing your way to work is stressful, and when a dealer says yes after a hard week, it feels like relief. But slow down before you sign. Being approved for a loan and being able to afford it are two very different things, and the difference will follow you for seven years.

Why is approved not the same as affordable?

A lender's approval answers one question: is it likely you will make the payments? It does not ask whether, after making them, you can still pay rent, buy groceries, save a little and handle a surprise. Dealers often sell a car by its monthly payment, because a payment sounds small. A seven-year loan makes almost any car's payment look possible.

What does $650 a month for seven years really cost?

Seven years is 84 payments. At $650 each, that is $54,600. If the loan's interest rate were 9 percent, you would be borrowing about $40,400, and about $14,200 of what you repay would be interest alone.

And the payment is only part of owning a car. A newer car financed with a loan usually needs full coverage insurance, which costs more. Then there is gas, oil changes, tires and registration. Add them all, and the true cost of this car could take close to a third of your take-home pay.

How much car fits on $3,400 a month?

A common rule of thumb is to keep all your car costs together, the payment, insurance and fuel, to around 15 to 20 percent of take-home pay. On $3,400, that is about $510 to $680 a month for everything. A $650 payment alone fills that space before you have bought a tank of gas.

The figures further down this page show a budget like yours with this car in it. The car alone, with its insurance, gas and upkeep, comes to ,010 a month, about 30 percent of your take-home pay. Together with rent, utilities and groceries, your needs take about three quarters of what you bring home, against the half a common budgeting rule suggests, and only a month is going to savings. You can try your own numbers in the Budget Planner.

What would a used car and a shorter loan look like?

Here is an example. Say a reliable used car costs $17,000, you put $2,000 down and borrow $15,000 over four years at 9 percent. The payment would be about $373 a month. After four years the car is yours, and the $373 can go to savings instead. In total you would repay about $17,900, compared with $54,600.

Put that payment into the same budget, and your needs fall by a month. That is enough to build an emergency fund in under a year, or to absorb a repair bill without reaching for a credit card.

A car three or four years old, with a good reliability record and service history, can serve you well for many years. Ask a trusted independent mechanic to inspect any used car before you buy it. The small fee can save you from a costly mistake.

Why are seven-year loans risky?

• You pay more interest, because you borrow for longer.
• You can owe more than the car is worth for years, since cars lose value fastest when new. If the car is wrecked or you need to sell it, you could still owe money on a car you no longer have.
• You are still paying when the repairs start. By year five or six, the warranty may have ended while the payments go on.

How do I shop for the loan?

Before you go back to the dealer, ask your bank or a local credit union to preapprove you for a car loan. Then you know the rate you qualify for and can compare it with the dealer's offer. Credit unions often offer competitive rates on car loans.

At the dealer, agree the price of the car first, then talk about financing. Compare offers by the interest rate and the total you will repay, not the monthly payment. Read every line of the contract, and say no to extras such as add-on warranties or protection plans unless you have read the terms and truly want them.

What if I have already signed?

In general, there is no automatic right to cancel a car purchase once the contract is signed, so read the contract carefully to see what it says. If you have signed, you are not stuck forever. Make every payment on time, add a little extra toward the balance when you can, and once your credit improves, ask a credit union whether refinancing at a lower rate and a shorter term would save you money.

You need a car, and you deserve a reliable one. But the right car is one that gets you to work and still leaves room for your life. Take a week, compare your options and choose the car that lets you sleep well.

One thing to do this week

Ask a credit union to preapprove you for a car loan, and price two reliable used cars before you return to the dealer.