How Much Car Can I Afford?

Buying a new, used or certified pre-owned car is always exciting. But before you sign on the dotted line to get your new set of wheels, it’s important to answer the questions, “How much car can I afford?” and “How much of a car payment can I afford?” While these two questions are less fun to answer, they are necessary to set you on the right road to a financially responsible decision. Overspend, and you might find yourself running into a financial roadblock.

There are several important factors to look at when making these decisions to make sure you don’t overspend. These factors include your income, your savings, how much car you need, the current market conditions and your credit score.

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In this article

    How much car can you afford?

    Outside of a house, a car will probably be the highest ticket item you purchase. Determining how much car you can afford starts with a look at your income, income stability, budget, credit score and savings. In other words, you need to pop the hood on your finances and see what’s cooking.

    First, compare your income with your current budget. How much extra do you have that you can put towards a monthly car payment? Remember to take out any other costs that might be replaced by having a car. For example, if you’re paying for Ubers and Lyfts regularly to get around, you can subtract those from the budget.

    Once you have a good picture of how much extra you have each month, compare this with your income stability. Is it just this month you have that extra money, or are you going to be able to sustain that surplus of money for years to come? Remember, car payments last for years, and you need to be prepared for that.

    From there, you need to start looking at what the monthly payments would be on certain dollar amounts. The idea is to figure out the most expensive car you can safely afford and work down from there. To figure this out, you’ll need to look at your credit score, what you have saved for a down payment and the figure of what you can afford monthly. Once you’ve done this, it’s time to compare lenders and loan types in order to determine which is best for you.

    Here are a few sample scenarios to see what monthly payments might look like with different APR rates, down payments and term lengths. If you want to know what rates you’ll be approved for, many auto lenders offer preapproval services that can give you an estimated rate within a matter of minutes.

     Scenario 1Scenario 2Scenario 3Scenario 4
    Car Value$10,000$10,000$20,000$20,000
    Down Payment$0$2,000$0$4,000
    Loan Term60 months60 months72 months60 months
    Sales Tax7.00%7.00%7.00%7.00%
    APY Rate5.00%5.00%4.50%3.50%
    Monthly Payment$202$164$340$317

    Costs to consider before buying a car

    Buying a car is going to add a lot more to your budget than just a monthly auto loan payment. When you’re calculating how much you should spend on a car, you need to make sure you’ve worked in all of the additional costs. This will bring down how much car you can afford, but it will give you a much more realistic look at what you should be buying.

     Small SedanMedium SedanLarge SedanSmall SUVMedium SUVHybrid
    Fuel$1,254$1,391$1,916$1,413$1,980$864
    Maintenance, repairs and tires$1,280$1,377$1,424$1,364$1,440$1,155
    Full Coverage Insurance$1,328$1,251$1,221$1,089$1,114$1,202
    License, registration and taxes$466$661$807$630$862$639
    Total Average Annual Cost$4,328$4,680$5,367$4,496$5,396$3,860

    Source: AAA; Assuming 15,000 miles driven

    How to budget for car ownership

    As you can see, the higher the down payment you make on your car purchase, the smaller the loan size and the smaller your payments. One of the best ways to make a more expensive car affordable is to delay the purchase and save up some money for the down payment.

    To budget a savings plan, you can always work backward from the car you want to buy. Determine the size of the down payment you need to make the car you want affordable. From there, determine how long you can comfortably wait to buy a new car. Divide the down payment by the number of months, and you have how much you need to save.

    For example, let’s say you determine you need a $4,000 down payment to make the car you want in your price range, and you can comfortably wait 18 months to get a new car. To save for a down payment, calculate $4,000 divided by 18 months, which equals about $222. If you can save $222 a month for the next year and a half, your dream car in this scenario will be in your price range.

    How to fund a car you can afford

    There are several ways you can work to tweak your financial situation to lower your monthly car payments to better fit your budget. The first option is changing the terms of your loan. Extending your loan out for a longer-term will lower your payments. It will also increase the total interest costs over the life of the loan, though, so be aware of that.

    Put down a larger down payment

    The second, and more desirable option, is to put down a larger down payment. Every extra dollar you put towards your auto loan down payment lowers the size of your loan, which lowers the size of your payments. It may require you to delay the gratification and wait to buy, but it will help you stay within the boundaries of fiscal responsibility.

    Check Your Auto Loan Rates

    View our top-rated lenders and find the best rates today. It’s quick and easy.

    Improve your credit score

    A third way that you can lower your monthly payments to fund your car purchases is by improving your credit. Your auto loan rate is heavily dependent on your current credit profile. The better your credit score and creditworthiness, the better interest rate you’ll get on your loan. A better interest rate means lower payments. Simple things like paying off other debt, checking your credit report for errors and continuing to make on-time payments on your other forms of debt will all help to bring your score up.

    Jason Lee

    Contributing Writer

    Jason Lee is a U.S.-based freelance writer with a passion for writing about dating, banking, tech, personal growth, food and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill sets with the rest of the world. Follow Jason on Facebook here

    Reviewed by

    • Courtney Mihocik
      Courtney Mihocik
      Editor

      Courtney Mihocik is an editor at The Simple Dollar who specializes in insurance, personal finance, and loans. Previously, she wrote and edited for Interest.com, PersonalLoans.org, Ballantyne Magazine, Thread Magazine, The Post, ACRN, The New Political, Columbus Alive and the Institute for International Journalism.