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Buying a Car: How Much Car Can You Afford?

Don’t let your heart rule your head when buying a car. No matter how much you love a car on the day you drive it off the dealer’s lot, you will hate it six months down the road if you are struggling to make the payments. Buying more car than you can really afford or stretching out the length of the loan to the point you will nearly always owe more on it than the vehicle is worth will eventually turn your new-car experience into one of stress and frustration at best, or repossession and bankruptcy at worst.

So then, is there a way to determine just how much car you can afford? The answer is, yes, but it requires a bit of soul searching, as well as some elbow grease. In other words: some sacrifice. But, here’s the toughest part, it should be done before you start your car search. The maximum amount you can spend on that monthly car payment needs to be seared into your brain before you begin the journey of buying a car. There is no point getting your hopes up about buying that new Jeep Wrangler if your budget only has room for a Hyundai Accent.

The Estimate

In your quest to establish the monthly amount you can afford to put into a new car, you need to first determine your net monthly income. That is, how much you bring home each month after taxes. If your employer issues you a W-2 form each year, your net income is fairly simple to calculate because your employer does it for you. If you are self employed or report your income to the government with 1099 forms, you’ll need to do some math and average out your monthly income. In any case, if you made $40,000 last year after deducting all the various taxes, that translates into roughly $3,300 per month. Don’t include bonuses in your average monthly take home pay. You can’t count on them.

Most financial experts agree that your car expenses (monthly payment, insurance, fuel, taxes, routine maintenance and so forth) should be no more than 15 to 20% of your net income. In our $3,300 example that works out to a maximum of $500 to $660 per month. As a ballpark number, figure around $100 per month for fuel and another $100 per month for insurance. See why that Wrangler might be a heartbreaker?

If you clear $3,300 per month, you should be spending no more than an estimated $300 to $400 per month on a car payment. That’s the absolute max. Find a new car for sale near you

The Budget

Estimating is just informed guessing. To establish an exact monthly car-payment maximum, you need to sit down and create a budget. How much do you spend on housing (including taxes and insurance), food, internet, medical insurance, monthly services, utilities, gym membership, saving and investments, and on and on and on. Don’t forget to include things like family movie night and eating out at restaurants. You may tell yourself that you are willing to eat out two fewer times a month to help make that new car payment, but most of us aren’t disciplined enough to follow through.

Once you’ve honestly tallied up all your monthly expenses, subtract that total from your average monthly net income. The difference is money left over to spend on your car and any other random expenses like that daily latte at the corner coffee shop that you didn’t include among your monthly bills. This is discretionary money. Even after you figure in your new-car expenses, there should still be some money left over in this pile as a rainy-day fund.

From that difference (discretionary money) you will need to make your car payment, as well as cover other auto expenses like parking, insurance, fuel, routine maintenance (oil changes, wiper replacement and so forth) taxes and annual registration, car washes, and other assorted related expenses.

The Details

Before getting down to the nitty-gritty of choosing your new ride, you need to know how much of a down payment you can make. This can be in the form of cash or a trade-in or a combination of both. You can determine what your current car will be worth as a trade-in by researching it on Kelley Blue Book ( The estimated value minus whatever might remain on the loan, is the amount your trade-in will be worth toward buying a new car. If you owe more on your current car than it’s worth, that will be added to the amount financed, further reducing how much car you can buy.

Autotrader Shortcut

Once you know the maximum you can spend on a monthly car payment and your down payment, Autotrader’s Price Calculator can help pinpoint the vehicle-transaction price to which you should be limiting your search. The only other number you will need to know to use the calculator is the amount of your state sales tax on automobiles.

Final Advice

If you can’t locate a new car you like in your price range, it’s not the end of the world. Drop back, gather yourself and consider a late-model certified pre-owned (CPO) car or truck. They typically cost thousands less than brand-new cars, and they provide a CPO factory warranty.

Related Car Buying Articles:

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

Russ Heaps
Russ Heaps is an author specializing in automotive, financial and travel news. For nearly 35 years he has covered the automotive industry for newspapers, magazines and internet websites. His resume includes The Palm Beach Post, Miami Herald, The Washington Times and numerous other daily newspapers through syndication. He edited Auto World magazine, and helped create and edit NOPI Street... Read More about Russ Heaps

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