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Buying a Car: How Much Can I Afford?


Before setting your sights on a new ride that’s out of reach, determine the answer to a crucial question you should be asking: “How much car can I afford?”

How much to spend on your next vehicle depends on many factors, one of the foremost being price. The average new car price in today’s market is more than $48,300. That cost is a considerable amount of money for most people, and it’s crucial to stay within your financial means.

This guide outlines the costs that make up your car payment, helps you determine the amount you can spend each month, and how to calculate a price range for shopping within your budget.

Car Affordability Calculator

Use Autotrader’s car affordability and budgeting calculator when you begin shopping for a new or used car. The simple tool lets you quickly find your budget’s best vehicle price point. Similarly, you can enter some basic information to estimate the monthly payment for an auto loan.

Refer to our car payment guide for additional helpful information on budgeting for a new or used automobile.

More on Affordability Calculator

Different factors can affect a car payment. If you’re financing your automobile purchase with a loan, the price of the car you can afford depends on those collective puzzle pieces.

Using our Affordability Calculator tool, you can easily calculate the maximum car price that fits your preferred monthly payment. Enter some details about your current and future car, including:

  • Monthly car payment budget
  • Interest rate
  • Length of loan
  • Sales tax rate
  • Down payment
  • Trade-in value
  • Amount owed on trade

Based on that information, the affordability calculator provides a price for you to use as a reference point when shopping for your next car.

RELATED: How to Trade in a Car You Haven’t Paid Off: Tips from Experts 

How Much Car Can I Afford?

Calculating the car price range to meet the monthly payment you want is simple. Deciding the amount of that budget is another matter.

Buying a car is a significant financial decision, and the process can be both exciting and stressful. Even experienced car buyers need reminders to keep emotion out of the equation. It is crucial to your financial health that you purchase a vehicle you can comfortably afford, not just the car you want.

Your purchase requires more than just the car price you negotiate. Your loan and monthly payment may include other fees associated with buying a vehicle, such as:

  • Taxes
  • “Doc” fees and additional dealer fees
  • Vehicle service or maintenance contract
  • Extended warranty
  • Other add-ons purchased at the time of delivery, such as all-weather floor mats or a roof rack

Keep in mind the associated costs of owning an automobile over time, such as insurance, gas, and maintenance.

Determining How Much Car You Can Afford

Your personal preferences contribute to setting the budget for your new ride. Remember that just because a formula indicates you can afford a certain amount doesn’t mean you need to spend that much.

Consider your priorities when deciding how much to spend on your next car. Some people have smaller budgets for vehicles because they choose to spend more on entertainment. Other people may buy expensive automobiles because they don’t have significant vacation expenses.

1. Calculate an Auto Budget You Can Afford

A car payment is just one item in your total monthly spending. Start with your monthly income after taxes. Then subtract each of your recurring expenses, which may include:

  • Rent/mortgage
  • Utilities
  • Food
  • Health care and insurance
  • Credit card bills
  • Childcare expenses
  • Savings contributions

Some personal finance experts recommend your auto budget costs (loan payment, insurance, gas, maintenance, and repairs) comprise around 10% of your monthly net income. One common suggestion is a 20/4/10 rule of thumb to help determine your automotive budget:

  • Put down 20% of the vehicle’s price.
  • Finance the purchase for no more than four years.
  • Keep transportation costs around 10% of your monthly income.

2. Check Your Credit Score

Knowing where your credit stands before applying for a loan could save you a lot of money in the long run. A loan’s interest rate, or annual percentage rate (APR), changes the amount of your car payment. Borrowers with higher credit scores generally qualify for a lower interest rate on a loan, reducing the overall cost of buying a vehicle.

The major credit bureaus — Experian, Equifax, and TransUnion — gather information on your credit payment history, amounts owed, length of credit history, new credit, and credit mix. A credit score, ranging from 300 to 850, is assigned using complex calculations to indicate if someone is more likely or less likely to miss a payment.

If you have a lower credit score, it can be challenging to qualify for a lower interest rate. However, you might obtain a better interest rate by making a larger down payment. More money down reduces the loan amount and, in turn, your monthly interest charges.

RELATED: How to Freeze Your Credit

3. Calculate Fuel Usage and Insurance Costs

In addition to a monthly car payment, your monthly automotive budget must include the cost of filling up the gas tank and paying for insurance. These costs can fluctuate depending on where you live, your driving habits, and your chosen vehicle.

For fuel expenses, refer to the EPA’s FuelEconomy.gov website. It has a detailed listing of fuel economy figures, annual fuel cost estimates, and other tools for new and used vehicles.

Contact your auto insurance company with information about the vehicle or vehicles you’re considering and obtain quotes. A newer car generally means higher insurance premiums for the owner.

4. Determine Your Extra Cash for Down Payment

Some auto dealers and lenders may offer zero-down-payment financing. A deal like this can be an enticing offer to many owners. However, putting down some cash when you close the deal is better to help cover various fees and taxes.

Sometimes making a larger down payment allows you to obtain a better interest rate. Any funds you can put into a down payment will reduce the amount you need to borrow.

Consider this example. A $41,000 vehicle might have an out-the-door price of $45,000, including taxes, registration, destination charges, and other fees. Making a $9,000 down payment leaves $36,000 to finance. A borrower with excellent credit history may qualify for an auto loan with a 3.99% interest rate. Over a 48-month loan term, the total interest paid is $3,009. The monthly payment will be about $813.

Every additional $1,000 you can put down will save $84 in interest and reduce the monthly payment by about $23.

Not long ago, 20% down payments were required when financing automobiles. Some advice suggests using that amount today, but many buyers have difficulty parting with that much money at once. Never deplete your savings account just to have a bigger down payment.

5. Calculate a Car Loan Amount You Can Afford

After you have figured out the amount you can comfortably spend for a car and related expenses each month, you must determine how much you want to borrow. That figure is affected by several factors related to APR and the length of the loan.

  • Credit score. Borrowers with higher credit scores generally qualify for lower interest rates because lenders see those customers as less risky.
  • Loan terms. The number of months you have to repay the money affects your monthly payment. Shorter loan terms create a higher monthly payment. Longer loan lengths bring lower monthly car payments, which means you’ll pay more in interest over the life of the loan. In general, aim for a 48-month loan.
  • New or used car. New car loans typically have more favorable interest rates compared to what’s available for used vehicles.

Pick a Target Purchase Price

The total loan amount you can afford doesn’t always match the price of the car you can afford. The cash you put down and the allowance you get from trading in your old vehicle determine whether you can get a higher-priced car or borrow less money.

You must factor in the additional costs that make up an automobile’s out-the-door price. Sales tax rates and other fees vary, but you can be sure that you won’t just be paying what’s shown on the window sticker. An easy way to estimate these extra expenses is to add 10% to the advertised price of the car.

  • Sales tax: Typically 5% to 10%, and may include state, county, and local taxes
  • Registration fees: Estimate these fees using your state’s department of motor vehicles site.
  • Documentation fee: Ranges from $80 to $400, depending on your state.

Now you can get a realistic idea of the purchase price you should target.

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Editor’s Note: This article has been updated for accuracy since it was initially published.

FAQ

How much of my salary can go towards buying a car?

Each car buyer comes from a different financial situation. Some personal finance experts advise that consumers designate about 10% of take-home pay for car payments and related automotive expenses.

How much should I spend on monthly car payments?

According to advice from some personal finance experts, your monthly car payment should be about 10% of your after-tax income. So if your take-home pay after taxes comes to $3,000 per month, your car payment should be no more than $300 monthly.

How much should I spend on a down payment for a car?

While it may not be required, some personal finance experts advise car buyers to put 20% of the total purchase price into a down payment. Don’t wipe out your savings account to make a larger down payment.

Chris Hardesty
Chris Hardesty
Chris Hardesty is an author specializing in general car tips and electric vehicles. He spent more than 25 years in newspapers, including leading editorial research efforts at The News & Observer in North Carolina, The Mercury News in California, and Newsday in New York. After that, he was an online news editor at The Wall Street Journal before moving to the Atlanta area. He didn’t have a... Read More about Chris Hardesty

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