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Car Payment Guide: Calculating What You Can Afford

Buying a car is a significant purchase involving thousands of dollars. For many people, this high ticket event includes financing a new or used car with a loan. The first step for potential buyers is often determining the car payment amount they can afford for a new ride.

Use our guide to determine how much you can afford each month, including budgeting for the car payment, taxes, and other fees.

How to Budget for Your New or Used Car

Before you start kicking tires at the dealership, use our budgeting and affordability car calculator. The easy-to-use tool can help you determine the maximum price for an automobile you can afford based on your preferred monthly car payment.

The tool will ask you for factors including:

  • Monthly car payment target
  • Information on cash down payment
  • Details about car trade-in value
  • Preferred loan terms
  • Tax rate

When you plug in the details that affect your monthly payment, an estimated car price is calculated to give you the range you should aim for.

These days, vehicles are selling at or close to MSRP because of high demand from potential buyers and short supply from manufacturers. While this trend isn’t good for wheeling-and-dealing at the car lot, expecting to pay the sticker price helps you plan a likely budget.

What Does a Car Payment Include?

The monthly payment for your financed new or used car can cover more than the price of the vehicle.

The loan — and your car payment — may include other fees associated with buying a car:

  • Taxes
  • “Doc” fees or other dealer fees
  • Destination charge
  • Vehicle service or maintenance contract
  • Extended warranty
  • Other add-ons purchased at time of delivery like a roof rack or towing package

Lenders and dealers determine the car payment based on many considerations. The most obvious factor for the loan amount is the price of the car minus the cash down payment and trade-in allowance. Interest rates for new vehicles typically are lower than used car rates.

Length of Loan

Your next consideration will be the length of the loan or the number of months to repay the money. Shorter loan terms create a higher monthly payment. Longer loan lengths bring lower monthly car payments.

However, longer repayment terms mean that you’ll pay more in interest over the life of the loan.

Loan lengths typically range between 3 to 5 years, or 36 to 60 months. But some take loans for shorter or longer periods.

Interest Rates

Loan interest rates change the amount of your car payment. Borrowers with higher credit scores generally qualify for lower interest rates because lenders see those customers as less of a risk.

If you have a lower credit score, you can 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.

Lenders also consider your total income when deciding the interest rate for your loan. The percentage of your income used for debt payment, or debt-to-income (DTI) ratio, is an indication of your ability to repay the loan. Having a lower DTI increases your chances of obtaining a lower interest rate.

How to Calculate a Car Payment

Our car loan payment calculator can help you estimate how much the monthly car payment will be for your next vehicle. When you’re shopping to get behind the wheel of your next vehicle, enter basic information into the tool to see how different factors affect a car payment.

You’ll enter information including:

  • Car cost
  • Loan length
  • Interest rate
  • Down payment
  • Trade-in car value (if applicable)

This information and other criteria will help you instantly calculate an estimated monthly cost of financing for your car payment. Use this simple calculator alongside our affordability tool to find the price point that fits your budget.

One piece of information the calculators ask for is the value of the vehicle you’re trading in. Our car valuation tool can help you determine that figure using basic info about your current automobile.

TIP: Because COVID-19 ratcheted up car prices for both new and used vehicles, there’s less wiggle room for negotiation right now. However, because demand for used cars is high, your trade-in could be more valuable to a dealer right now. So before you negotiate your trade-in, first get the best price on the vehicle you’re buying. Once the final price is established, then negotiate the trade-in as part of the deal.

How to Find Out Your Credit Score

Knowing where your credit stands before applying for a loan could save you a lot of money.

The major credit bureaus — Experian, Equifax, and TransUnion — gather account information from your creditors to assemble your credit history. A credit report may include a summary of information, including credit limits, high balance, current balance, payment history, and so forth. It tells a potential lender how much indebtedness you currently have and how reliably you have paid your bills in the past.

According to Equifax, the credit score ranges are as follows:

  • 300-579: Poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very Good
  • 800-850: Excellent

A key component of a credit report is your credit score. This number is assigned using complex calculations to indicate if someone is more likely or less likely to miss a payment. The farther away you get from past credit problems, the more your score increases. Borrowers with higher credit scores qualify for better loan rates.

To find your credit score, check your credit card, financial institution, loan statement, or credit bureaus. Many credit card companies, banks, and loan companies provide credit scores for their customers. According to Equifax, you can obtain a free credit report every 12 months from each of the credit bureaus by visiting the annual credit report site. Due to the pandemic, credit bureaus started offering free credit reports more frequently.

My Wallet

Autotrader offers another tool, called My Wallet, which puts everything together for you.

My Wallet lets you search car inventory (even in a tight market) using your specific budget, which it helps calculate using everything from your car trade-in value to credit score. You can even search by a particular payment based on real interest rates. It puts the car buyer in control before stepping foot in a dealership.

To find the My Wallet dashboard, go to the Autotrader homepage. Look in the upper right corner for the wallet icon with a dollar sign to access the My Wallet new tool.

Determining Car Taxes and Fees

New car buyers should remember that the sale price is never final because destination charges and dealer fees usually get added to the invoice. Some fees are listed on the car window sticker, while others aren’t mentioned until you’re ready to begin signing paperwork.

A destination charge, sometimes called a freight fee or freight delivery charge, ensures that new car buyers pay equally to cover the cost of delivering a vehicle to a dealership. According to United States law, car delivery always gets listed as a separate line item on a new car window sticker. Destination fees range from about $850 to $1,700.

Other common dealer fees aren’t as clear cut because they don’t appear on the car window sticker:

  • Tax: Make sure to research your state’s regulations on tax rates before buying a car and understand how the collection affects your final sales price.
  • Title and registration: Dealers pay these fees to process the title and registration of the car. It’s a standard fee and saves car owners a trip to the state Division of Motor Vehicles. Know your state’s fees ahead of time and make sure the invoice charges are reasonable for the dealer to handle this paperwork.
  • Delivery: If you see a delivery fee in the final charges for the car, ask the dealer about it because it may be negotiable.
  • Documentation: Sometimes known as a “doc” fee, these fees cover the sales documentation preparation costs. Some states regulate these fees.
  • Other: Check this category carefully on your sales invoice. Other fees, such as for reconditioning, vehicle prep, additional dealer mark-up or profit, and factory holdback, are a few examples of charges that might show on your invoice. It can’t hurt to ask for these fees to be removed.

How to Get a Low Car Payment

Try these strategies and tips to get lower car payments. Some will take time to implement, while you can use the other advice immediately.

  • Select a less expensive used car. You might save hundreds of dollars each month by choosing a used model over a new vehicle.
  • Make a larger down payment. While you shouldn’t wipe out your entire savings, make a down payment that fits your budget because the larger it is, the less your monthly car payment.
  • Extend the length of the loan. Longer repayment terms create smaller monthly payments. Just know that these can cost more in the long run.
  • Avoid unnecessary fees. Pay attention to what you’re signing and question everything you see on the invoice. Every dollar contributes to your monthly payment.
  • Boost your credit score. Improving your credit takes time, but a good credit score will help you qualify for better interest rates.
  • Reduce debt. Having a lower debt-to-income ratio shows lenders that you can pay off the loan, which increases your chances of getting a good interest rate.

Be sure to shop around and do your homework for the best deals on vehicles — and for loans, too. You aren’t required to finance your car through the dealer’s preferred lender.

However, automakers’ lenders sometimes offer new auto loans with 0% or low-interest rates for well-qualified buyers.

Tips for Buying a Car

Learning to buy a used car or a brand new vehicle is the initial step toward car ownership. Because most people don’t buy cars as often as they purchase shoes, it can be an intimidating and stressful process.

The primary cause of stress stems from the finances involved with buying a car. To ease the anxiety and make the process smoother, carefully figure out your budget before you begin shopping and studying negotiating tips.

Be sure to factor in all expenses related to ownership when planning how much you can afford for a vehicle. In addition to the monthly car loan payment, you’ll have gas, repairs, and maintenance costs.

Don’t forget that one significant expense is car insurance. The cost of insurance coverage for certain makes and models might put them out of your reach. You can save time and avoid potential frustration or disappointment by writing down VINs (vehicle identification numbers) of cars online that interest you early in the process. Then, get a few sample insurance quotes before continuing to shop for your new wheels. See cars for sale on Autotrader


How Much of a Down Payment for a Car Should You Do?

A good down payment is 20% to avoid being upside down (should anything happen) on your loan once you drive it off the lot. Some people use the trade-in value of a car as a down payment. If your credit is less than excellent, car dealerships will often give you a better interest rate when you make a larger down payment. Use our car affordability calculator to plug in your down payment and other details to know how much you can afford before you head to the dealership.

How to Calculate a Lease Payment

The same as you would calculate a car payment, you can calculate a car lease payment. To get an idea, use our monthly car payment calculator. Oftentimes, lease payments will be much less than car payments. But it helps you know how much to expect and what you can afford.

Can You Get a Car With No Down Payment?

It’s possible, but not advisable to buy a car with no money down. Typically, a loan or a lease requires a down payment. The bigger the down payment you make, the lower your monthly payment. If you trade in a vehicle, you can use that amount toward your down payment. Just know that dealerships will be happy to finance everything, including the down payment. But it often costs you more money because you could be subject to a higher interest rate for the privilege of no 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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