Calculating How Much Car You Can Afford (2022)
Updated June 15, 2022
Whether you’re leasing or buying, becoming a car owner is definitely exciting. However, it also needs to be practical. When you shop around, it’s important to consider just how much you can put toward an auto loan, monthly car payments, and other auto expenses, like registration fees, repairs, and fuel. This guide can help you figure out how much car your budget can buy.
Car expenses like maintenance, registration, and gas can add up. One way you can save is on your auto insurance. Getting a car can be a big financial decision, but Insurify makes it easy and affordable. Our car insurance comparison tools do all the hard work to sift through millions of quotes from hundreds of companies in the market to make sure you get the cheapest rates!
The two main costs you should be aware of are your car loan and monthly payments.
Insurance costs vary based on the type of car you buy, so be sure to do your research.
Car ownership comes with expenses that go beyond the sticker price at the dealership.
The general rule of thumb for calculating how much you can afford to spend on car payments is no more than 10 percent of your take-home pay.
Sales representatives at dealerships will almost always try to push you toward the higher end of car prices. Be sure to come prepared with a firm stance on your budget and how much you’re willing to budge for a pricier car. Doing a little bit of easy math can help you make sure your car purchase isn’t going to put you into debt. Try using a car affordability calculator, or try our tips.
You shouldn’t spend any more than 10 percent of your take-home pay on your monthly car payment. For example, if your monthly income after taxes is $4,000, you could budget $400 each month for your car loan payment. You could choose to pay less money each month, but then you would have to consider refinancing your loan term.
In addition to your monthly payment, you also need to consider the extra costs that come with having a car. Be mindful that you’ll also have to pay a motor vehicle registration fee, license plate fee, and vehicle title fee before you start driving your new vehicle, whether it’s brand-new or used. Be sure to check your state’s laws and what your state’s DMV requirements are.
Including these registration fees, you should expect to pay 15 to 20 percent of your regular paycheck on additional auto-related expenses. So, if your monthly take-home pay is $4,000, that would mean putting aside $600 to $800 per month for your car, and not past that limit. This amount includes gas, car maintenance, your auto insurance policy, and more.
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The first step to this is calculating how much your household earns. Add up your income from various sources, like your (and potentially your partner’s) salaries, side hustles, etc. If you are replacing an old car with a new one, see if you can get money back on its trade-in value. Be sure to account for your taxes so you end up with your post-tax, a.k.a. spendable, amount.
Then, start figuring out how much your household spends. This includes fixed bills like rent or a mortgage, insurance policies like health, renters, or homeowners, and other loans. Looking at your past expenses can help you figure out how much you spend on groceries, dining out, entertainment, shopping, and more. Consider getting a budgeting app to help you keep track.
After subtracting your average expenses from your income, you will have a realistic amount of how much you can spend on a down payment on a new car (and monthly car payments). If you can’t afford the type of car you like, see if you can trim down your variable expenses to make room for the purchase you want. You can also speak with a financial expert to help you budget.
Once you have the purchase price you can spend on your initial car payment figured out, you can determine your loan amount. Unless you decide to buy your car fully in cash, you will have to take out a loan. Borrowing money from lenders that gets paid back at an interest rate probably doesn’t seem ideal, but it isn’t a big deal if you research and prepare.
Figuring out how much you need to borrow depends on several factors, like:
Your credit score: Having a better credit score usually means that you will pay a lower interest rate. On average, having a score of 670 or higher will get you a lower annual percentage rate, or APR, on your total loan amount. You can figure this out from getting a credit report from an agency, like Experian or Credit Karma.
Your loan term: This is up to you and how much you’re willing—or able—to spend on a monthly payment. Simply put, the more you pay each month, the less time it takes to pay off your loan. It might seem attractive to pay a lower amount each month, but know that the longer you stretch it out, the longer it takes to pay off, which could hurt with interest.
Some lenders will give you the option of a seven-year loan, but financial experts generally warn against loan terms longer than five years. If you have a poor credit score and qualify for a high APR and then choose a seven-year loan term, you could end up paying double the sticker price of the car by the end. Yikes!
Using your credit card for your down payment: Credit cards allow you to pay more up front and potentially take out a smaller loan. But if you choose to buy with credit, then be sure to take making payments with your credit card interest into account. You may want to talk with a personal finance advisor before to see if this is a good option for you.
Buying a new or used car: They each have their own pros and cons, but know that new car loans tend to have lower APRs. Check out the next section to learn more.
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If you do need to take out a loan, be sure to think about how comfortable you are with having debt. People who are more debt-averse might want to consider paying for their car in full, getting a cheaper car, or exploring other alternatives to owning a car. If you don’t like the last choice or it’s just not an option, you could try a used car.
If you really want to save on your car payment and avoid taking out a loan, getting a used car is a great option to make that happen. Do your research and prioritize certified pre-owned cars. These are secondhand vehicles that have passed a rigorous and standardized quality check. If the car fails, it is refurbished and repaired to meet standards, usually by the manufacturer.
However, used and new cars each have their own list of pros and cons. A full disclaimer: While used cars usually cost less overall and can be cheaper to insure than new ones, they might not be available to lease. In the end, you still might have to take out a loan if you want to buy one. New cars depreciate quickly but come with newer and nicer features as well as a warranty.
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When making any major purchase, you want to be sure you’ve done your research so you’re prepared for that big payment amount. In terms of your loan, you can compare interest rates from different lenders using a loan-comparison site to check out multiple rates.
In terms of the car, your budget will help narrow down options. Once you know what models you can afford, be sure to look up prices on various sites so you know how much to expect to pay. Set the maximum sticker price for lower than your determined loan amount because you’ll need to account for sales tax and other fees, which can add up to an extra thousand dollars or more.
Then, be sure to negotiate. Some car-buying sites don’t allow this, but haggle in person if you can. At the end of the day, dealers are there to make a sale. You want a great price on your car just as much as they want to sell it to you. Once you have your budget and extra costs figured out, you’ll have a concrete number or price range that makes it easier for you to negotiate.
Doing a bit of work before you head to the dealership can help you save hundreds—and potentially even thousands—of dollars in the long run. All it takes is a few steps and some easy math to determine a final sticker price and loan payment that you know you can afford. Once you’ve nailed these numbers down, you can narrow down your options while car shopping.
A down payment, monthly car bills, and extra fees can add up. Be sure to cut costs where you can, like your car insurance payment. Doing research on auto insurance quotes can make sure you get the best deal. Insurify is the best and easiest way to get a car insurance comparison! We do all the work to help you compare rates and get a policy you can afford—and all for free.
There are plenty of ways to budget for car ownership. One thing car buyers can consider is getting a used car, instead of a brand-new one. Unfortunately, most cars go down in value the second you drive off the lot. A new ride is nice, but a certified pre-owned car might be a better option if you want to save. A cheaper car means lower monthly payments.
The total amount varies based on factors like your annual income, how much you pay in taxes, the total interest amount on your loan, and more. On average, you should expect to put about 25 to 30 percent of each paycheck post-tax toward your car expenses. 10 percent goes toward your monthly payment and 15 to 20 percent is for any additional, but regular, costs.
There are plenty of tools online that can help you figure out how much you’ll end up spending on your car. Car loan and affordability calculators can do the math throughout the entire process. Edmunds’ “True Cost to Own” tool can help you determine extra costs beyond the sticker price, like interest, depreciation, gas, and maintenance.
Almost every state requires drivers to carry some form of auto insurance. Another car-related expense doesn’t have to be daunting. Let Insurify do all the work to help you find a policy you can afford. Our tools make it easy to compare quotes from hundreds of companies in the market to make sure you’re protected without breaking the bank. Try it for free today!
Data scientists at Insurify analyzed over 40 million auto insurance rates across the United States to compile the car insurance quotes, statistics, and data visualizations displayed on this page. The car insurance data includes coverage analysis and details on drivers' vehicles, driving records, and demographic information. With these insights, Insurify is able to offer drivers insight into how their car insurance premiums are priced by companies.
Maria Sanchez is a personal finance writer specializing in auto, home, and renters insurance. With a special interest in educational content, Maria distills complex financial information to be more accessible to the greater public. She holds degrees from the University of Massachusetts and the London School of Economics.Learn More