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.

Auto Loan Express

Auto Loan Express
Min. Loan Fixed APR Term
N/A N/A 24 - 72 months
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Auto Loan Express

Auto Loan Express
Min. Loan Fixed APR Term
N/A N/A 24 - 72 months
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CarsDirect

CarsDirect
Min. Loan Fixed APR Term
N/A 3.00% - 12.90% 24 - 72 months
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CarsDirect

CarsDirect
Min. Loan Fixed APR Term
N/A 3.00% - 12.90% 24 - 72 months
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LightStream

LightStream
Min. Loan Fixed APR Term
$5,000 4.99% - 10.49%

LightStream Disclosure

24 - 84 months

LightStream Disclosure

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LightStream

LightStream
Min. Loan Fixed APR Term
$5,000 3.49% - 9.49%

LightStream Disclosure

24 - 84 months

LightStream Disclosure

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on lender's secure website

LightStream

LightStream
Min. Loan Fixed APR Term
$5,000 3.49% - 9.49%

LightStream Disclosure

24 - 84 months

LightStream Disclosure

LEARN MORE

on lender's secure website

LightStream

LightStream
Min. Loan Fixed APR Term
$5,000 3.49% - 9.49%

LightStream Disclosure

24 - 84 months

LightStream Disclosure

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on lender's secure website

MyAutoLoan

MyAutoLoan
Min. Loan Fixed APR Term
$7,500 3.49% - 18.03% 24 to 72 months
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MyAutoLoan

MyAutoLoan
Min. Loan Fixed APR Term
$7,500 1.79% - 21.03% 24 - 72 months
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MyAutoLoan

MyAutoLoan
Min. Loan Fixed APR Term
$7,500 3.74% - 18% 24 to 72 months
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Penfed

Penfed
Min. Loan Fixed APR Term
$500 2.14% - 6.29% 1 - 7 years
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Penfed

Penfed
Min. Loan Fixed APR Term
$500 1.39% - 2.49% 36 - 72 months
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Penfed

Penfed
Min. Loan Fixed APR Term
$500 2.24% - 3.49% 36 - 72 months
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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 1 Scenario 2 Scenario 3 Scenario 4
Car Value $10,000 $10,000 $20,000 $20,000
Down Payment $0 $2,000 $0 $4,000
Loan Term 60 months 60 months 72 months 60 months
Sales Tax 7.00% 7.00% 7.00% 7.00%
APY Rate 5.00% 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 Sedan Medium Sedan Large Sedan Small SUV Medium SUV Hybrid
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.

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.

Too long, didn’t read?

Determining how expensive a car you can afford and sticking to your budget can make the entire car buying and ownership process that much more enjoyable. By taking into account the hidden costs, your financial picture and determining what you really can afford every month, you are prepared to make an informed decision before you even step foot out the door to head to the dealer or log on to an auto sales website.

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Jason Lee
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

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  • 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.