National Association of Real Estate Editors member
Bylines include Forbes, Bankrate, and CBS News
Aly is a reporter specializing in real estate, mortgages, and personal finance. You can find her work in Hearst newspapers and numerous financial publications.
3+ years experience in insurance and personal finance editing
Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.
Mark FriedlanderDirector, Corporate Communications
Corporate communications director for Insurance Information Institute
20+ years in insurance and communications
As Director, Corporate Communications for Triple-I, Mark serves as the non-profit’s national spokesperson, sharing information and education on a wide array of insurance issues.
Konstantin has led data teams across multiple industries, including insurance, travel, and biology. He’s led Insurify’s engineering team for more than three years.
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Buying a new car can be an exciting experience — as long as you enter the process prepared. You’ll need to begin by assessing your finances, researching vehicle makes and models, and determining how much you can comfortably afford before setting foot on the dealership lot. Finding cheap car insurance is also an important part of buying a car.
If you’re in the market for a new or used car, this guide will help you determine how much you can afford to pay up front and in monthly payments for your new vehicle.
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How to determine what you can afford to pay for a car
The 20/4/10 rule is a common strategy for determining how much you can afford to pay for a new vehicle if you plan to finance the purchase. To determine whether you can afford to buy a particular car, you’ll need to consider the type of down payment you’re willing to pay, how long of a loan term you want, and projected monthly vehicle expenses.
20/4/10 rule explained
Per the 20/4/10 rule, a car is affordable to you if you can put a down payment of 20% or more on it and finance it with a loan term that lasts no longer than four years. Lastly, you should make sure your total monthly car expenses, including car payments and insurance, don’t add up to more than 10% of your monthly gross income.[1]
To use the 20/4/10 rule, you’ll need to have a good understanding of your savings and monthly earnings. You may also want to use a good auto loan calculator to help you estimate your potential monthly payments, gas costs, and insurance premiums. Once you have these numbers, you can work backward to figure out how much you can afford to pay for a car.
Considerations when using the 20/4/10 rule
While the 20/4/10 rule can help you determine an estimated price range to shop in, it’s not a perfect tool for everyone. This calculation doesn’t account for your overall monthly budget and expenses, so you’ll want to take a look at your bigger financial picture.
For example, you may be able to spend a bit more than 10% per month on your vehicle if you have low monthly housing costs or no debt. Alternatively, you may be trying to save more each month and decide to cap monthly car costs at less than 5% of your monthly income.
Important Information
Many personal finance advisors recommend against long-term car loans. That’s because the longer the loan term, the higher the interest rate will be, and the more you’ll pay for the car in the end.
Understanding your financial situation
Before making any large purchase — like a new car — you should carefully review your personal finances and create a plan. This means understanding your income, knowing your recurring bills and expenses, and keeping track of the debts and credit card balances you have.
Your monthly income
Having an accurate picture of your earnings is critical before you can gauge what car you can afford. If you have a salaried job, you can simply calculate your monthly earnings by dividing your annual income by 12. If you have an hourly wage or work multiple jobs, you’ll need to look at your bank account for a better idea of your monthly take-home pay.
Your monthly expenses
Understanding your monthly costs is vital because this tells you how much money you have to put toward your new car payment. When adding up your monthly expenses, include your household utilities, mortgage or rent payments, groceries, daycare costs, insurance, subscriptions, and any other recurring monthly expenses you can think of.
Current debts and loans
Finally, you also need a tally of the monthly debt payments you owe. This includes any mortgage, car, or student loan payments, as well as your credit card bills. If your credit card balances tend to fluctuate a bit, check your statements for the last year to determine your average monthly payment.
Three ways to finance a car
Your finances will influence the best way for you to pay for your car. For someone with a sizable amount of money in savings, buying a car in cash may be the best choice. For others, having a car loan or lease makes more sense.
Here’s what to know about all three options.
Car loan
A car loan lets you spread the cost of your car purchase across several years. These costs include monthly principal and interest payments. The length of the loan can range between one to nine years depending on the lender, though the most common term is six years. Keep in mind that the longer your loan term is, the more you’ll pay in interest.
Financing Example
Financing a $30,000 vehicle for 72 months with a 7% interest rate and 20% down payment will give you monthly car payments of around $409 and total interest charges of about $5,461. If changing the loan term to 60 months drops your interest rate to 5.31%, your monthly payments will be approximately $456, with total interest of about $3,379. The longer-term loan “saves” you $47 per month on your payment amount, but adds another $2,082 in interest to the final cost of the loan.
Lease
A car lease is an option that allows you to borrow a vehicle for a monthly leasing fee from the dealership for a certain amount of time. Most leases last two to three years, though some lenders offer five-year terms.
At the end of the lease term, you can opt to buy out your lease and keep the car, trade in the car for a new leased vehicle, or simply turn in the vehicle and move on.
Paying cash
Your last option is to purchase the car outright with cash. This is typically only an option if you have a lot of liquid assets. You shouldn’t completely drain your bank account and have nothing left for living expenses, other monthly payments, and emergencies. You may also choose to save for a few years in a separate account you’ve earmarked for a car purchase.
If you choose to finance your vehicle purchase with a car loan, several factors will affect your monthly payments and how much you can afford to pay for a car. Here are the three main components for you to pay attention to.
Down payment
A down payment is essentially a deposit on your vehicle. The bigger the down payment is, the smaller your car loan balance and monthly payment will be. If you choose to follow the 20/4/10 rule, you should consider making a down payment of at least 20% on your vehicle.
Car loan interest rates
The interest rate you get on your loan — usually referred to as the annual percentage rate (APR) — also influences your monthly car payment. Car loan interest rates have risen dramatically over the past year, making auto loans more expensive. You may be able to negotiate with your bank or credit union to get a lower interest rate. Shopping around for your lender can also help reduce your rate.
Length of the car loan
How long your car loan lasts will also affect your monthly payments. A longer loan term will spread your balance across more months and lower your payments, but you’ll pay more in interest over time. Having a shorter loan period will make your monthly payments more expensive but reduce how much interest you pay overall.[2]
Car buying: New vs. used
Whether you buy a new car or a used one can also play a big role in what you can afford. Generally speaking, used cars cost less, but buying a used car can come with downsides. It’s important to consider the benefits and risks of buying a new or used vehicle.[3]
Pros and cons of buying a new car
Though ideal for some, buying a new vehicle may not be the right move for everyone. Here’s what to consider before buying a new vehicle.
Pros
Comes with a warranty
May not need repairs anytime soon
Often comes with customizable vehicle features
Cons
Usually more expensive
Insurance may cost more
Depreciates in value quickly
Pros and cons of buying a used car
While used cars may come with smaller price tags and require smaller loans, you should also consider the potential drawbacks of buying a used car. Here are the pros and cons to consider before buying a used vehicle.
Pros
Likely less expensive than a new vehicle
Insurance may cost less
Monthly loan payments may cost less
Cons
May not include a warranty
The car could have damage
May need repairs sooner
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Additional expenses to consider
In addition to your down payment and monthly payments, you’ll face other costs when buying a vehicle. Make sure you account for the following costs in your budget as well.
Car insurance
You’ll need to insure your vehicle. At the very least, you need to buy enough coverage to meet the minimum requirements in your state and from your lender or lessor. The exact cost of your insurance will depend on more than a dozen rating factors, including your insurance company, location, age, gender, credit history, type of car, and the amount of coverage you opt for.
Fuel and maintenance costs
You’ll also need to cover the cost of gas, which depends on your location and how much you drive your vehicle. Other regular maintenance includes costs for annual inspections, oil changes, and tire rotations.
Unexpected repairs
If your car needs repairs following a car accident or a malfunction, you’ll need to pay for it. Depending on your insurance coverage, your insurer may cover some costs if you file a claim and pay your deductible. The typical driver spends about $550 on car repairs each year, according to data from Kelley Blue Book and Cox Automotive.[4]
If you still don’t know how much you can afford to pay when buying a vehicle, the following information should help you navigate the process.
How do you calculate if you can afford a car?
Experts recommend using the 20/4/10 rule to gauge if you can afford a vehicle. Per this rule, you can afford a car if you can comfortably put a 20% down payment on the vehicle, finance it with a car loan for a period of four years or less, and keep your monthly vehicle costs at or below 10% of your monthly income. These monthly costs include loan payments, gas, insurance, and maintenance costs.
What car can you afford based on your salary?
The 20/4/10 rule can help you determine what car you can afford based on your salary. Just divide your salary by 12 to get your monthly earnings. Your total transportation costs — loan or lease payment, gas, and insurance included — should add up to 10% or less of your monthly income.
What car can you afford if you make $50,000 per year?
If you make $50,000 per year — or $4,166 per month, you should aim to keep your transportation costs (car payment, gas, and insurance included) to $416 per month or lower.
How does the length of a loan term affect the total cost of a car?
Longer terms will result in lower monthly payments, but you’ll pay more in interest over the life of your loan. Shorter loan terms mean the opposite: higher monthly payments but lower interest costs in the long run.
Kelley Blue Book. "Here’s How Much the Average Car Repair Now Costs."
Aly J. Yale
Aly J. Yale is a freelance writer and reporter covering real estate, mortgages, and personal finance. Her work has been published in Forbes, Business Insider, Money, CBS News, US News & World Report, and The Miami Herald. She has a bachelor’s degree in radio-TV-film and news-editorial journalism from the Bob Schieffer College of Communication at TCU and is a member of the National Association of Real Estate Editors.
Edited byKatie PowersAuto and Life Insurance Editor
Katie PowersAuto and Life Insurance Editor
Licensed auto and home insurance agent
3+ years experience in insurance and personal finance editing
Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.
Mark FriedlanderDirector, Corporate Communications
Corporate communications director for Insurance Information Institute
20+ years in insurance and communications
As Director, Corporate Communications for Triple-I, Mark serves as the non-profit’s national spokesperson, sharing information and education on a wide array of insurance issues.
Konstantin has led data teams across multiple industries, including insurance, travel, and biology. He’s led Insurify’s engineering team for more than three years.
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