The amount of cars you can buy depends on factors such as your monthly income, credit score, down payment, and more. Experts usually recommend spending less than 20% of your take-home pay in your car. This includes expenses such as car payments, fuel, insurance and more.
Great monthly payments aren’t too big for easy management, but not too small enough to extend the loan term. In the long term, there will be interest costs. Check your monthly budget and use your car loan calculator to determine your monthly payments and duration.
How to calculate a car you can afford
Setting up a shopping vehicle for budget and comparison will prevent you from choosing the vehicle spending or choice you will regret later. Plans from a while ago can give you confidence when you’re ready to commit to a car loan and a new set of wheels.
1. Save down payment
By placing money in advance on your car, you reduce the amount you need to raise funds. It will help make your loan more affordable. It also provides more equity for your vehicle and reduces the risk of being upside down on a car loan.
Paying a down payment can save you hundreds or thousands of dollars over the life of your loan. It will help you reduce your monthly payments and the total amount you pay. It may help you get better rates when applying for a car loan.
2. New, second hand, lease decided
Whether you lease or buy a car, and whether the car is new or used, will make a difference to what you can afford.
Leases are a great option for drivers who want lower monthly payments and the ability to drive the latest models. Your payments cover vehicle depreciation rather than the total amount of the vehicle. However, you still need to spend money. You will have to pay to maintain a car you don’t own in the end.
Buy a full location in the driver’s seat with no mileage restrictions or additional charges for wear and tear. It costs more than buying a car. You also need to ensure that depreciation doesn’t turn you upside down on the loan. But you can own a car and sell it if you want.
If you decide to buy a car, you will need to choose a new or used car. The new car offers the latest features and some customizations, but is depreciated faster and comes with a higher price tag. Maintenance costs for used cars can be high and monthly payments can be very small.
Use Calculator Buy and Purchase to calculate your potential savings. The reasonably priced ones depend on how you use your vehicle, so read the complete advantages and disadvantages of each before committing.
3. Consider your salary
Your salary is one of the main factors that determine which car loan is best for you. Edmunds recommends that new car payments be less than 15% of monthly takeaways. Payment for used cars must be less than 10%, but the number may vary depending on whether it is a certified used car or a new model.
To determine which car you can afford, divide your annual income by 12, then multiply that number by your budget ratio. Below is an example of monthly car payment limits based on the amount of income you want to spend on your vehicle.
| annual income | 10% of your monthly budget | 15% of your monthly budget | 20% of your monthly budget |
|---|---|---|---|
| $30,000 | $250 | $375 | $500 |
| $50,000 | $417 | $625 | $833 |
| $70,000 | $583 | $875 | $1,166 |
| $90,000 | $750 | $1,125 | $1,500 |
| $120,000 | $1,000 | $1,500 | $2,000 |
| $140,000 | $1,167 | $1,750 | $2,333 |
If insurance, fuel, or other regular monthly expenses are included, the cost must not exceed 20% of your monthly take-out salary. Even if you have cash available to pay the car’s fees in full, you should consider purchasing in the full context of annual sal and costs. Specifically, rather than making affordable payments over time, they buy in cash, and in some cases dig into or wipe out emergency funds.
4. Please quote your monthly car payments
You can estimate the interest rate on your car loan by checking the average car loan interest rate with your credit score.
| Personal FICO score | Average interest rates for new car loans | Average interest rates for used car loans |
|---|---|---|
| 781-850 | 4.77% | 7.67% |
| 661-780 | 6.40% | 9.95% |
| 601-660 | 9.59% | 14.46% |
| 501-600 | 13.08% | 19.38% |
| 300-500 | 15.75% | 21.81% |
Source: Experian State of the Automotive Finance Market Q4 2024
The interest rates you receive on a car loan play a major role in how many cars you can buy and how much you pay each month. In many cases, a higher credit score will result in lower interest rates, ultimately reducing monthly payments and total loan costs.
Follow these simple tips to get started.
- Draw a copy of your credit report and learn your credit score.
- Prequalify with at least three lenders to determine the average interest rate you can offer.
- Plug the interest rate, the length of the desired loan term and the price of your car into the calculator.
Then, with the help of an auto loan calculator, you can determine how different interest rates affect your monthly payments.
5. Apply for pre-approval
A pre-approved car loan is a loan that the lender agrees to provide under certain conditions. It provides the amount, interest and terms of the loan they are willing to give you. With Preapproval you can approach the dealer like a cash buyer. If the dealer wants to fund you, the finance office must win an offer you already have.
To qualify for pre-approval, your lender will look at your credit score, income, debt-to-income ratio, or DTI. This measure compares your monthly bill with your monthly total income. In addition to making dealer negotiations easier, a big advantage for you as a buyer is that you show you how much you can afford in advance and what your monthly payments will look like. This will help you decide which vehicles you have realistically within your budget.
6. Determine the price for outdoors
Vehicle loan payments include more than the cost of the vehicle alone. Pay attention to outdoor (OTD) prices. This takes into consideration not only the cost of the vehicle, but also the taxes, fees and add-ons you buy.
Using research, you can learn what to expect with state sales taxes and ownership and vehicle registration fees. Legal or company policies require some dealer fees, but other dealers may be on the table for negotiation or removal. Understanding what’s not open for discussion can save you time and frustration at the negotiation table.
With affordable prices in mind, you can aim for a specific sticker price while shopping for your vehicle. Understand that the OTD price will add 10-15% to the car price, depending on the locale.
7. Additional vehicle cost factors
Your monthly payment is just one of many costs of ownership of the vehicle. Fuel, insurance and maintenance must be all factors in deciding how many cars you can buy.
- Research fuel efficiency. For mileage estimates for your vehicle, search evereconomy.gov. Choosing a car with excellent fuel economy will save you money each month and help you maximize your employer mileage refund.
- Please check the insurance premium. Adding another car to your policy will affect your rates. Use your car insurance calculator to understand your potential insurance costs. Costs vary by vehicle and individual, and two cars similar to you may differ significantly from the insurance company.
- Calculate the cost of ownership. Edmunds and Kelley Blue Books have tools that take into account the expected fuel costs, maintenance, repairs, state fees and average depreciation costs, allowing additional costs to be taken into account when developing your vehicle budget.
Conclusion
Being realistic on a budget will help you avoid pinching pennies after bringing home a new ride. Before you settle for your car, consider all the potential costs, not just monthly payments. Aim to find a car that costs under 20% of your takeaway salary.
The goal is to find a car that meets your expectations and leave you with money to cover unexpected costs and income changes.
