Balance Your Budget Your Life And Your Car Payment
NerdWallet recommends using the 50-30-20 rule, dividing your take-home pay into three general spending categories:
50% for needs such as housing, food and transportation which, in this case, is your monthly car payment and related auto expenses .
30% for wants, such as entertainment, travel and other nonessential items.
20% for savings, paying off credit cards and meeting long-range financial goals.
The monthly payment for your auto loan definitely falls into the needs category. For many people, a car is a lifeline, connecting them to essential tasks such as holding down a job or transporting the kids to school.
However, there’s some flexibility in the balanced budget approach. If you want a more expensive car, you could consider part of your monthly payment as spending in the “wants” category, so long as you keep the budget balanced overall.
So, while 10% of your take-home pay for your car payment may sound restrictive, if you economize in other budget areas, then you could choose to spend more on your car.
Consider All Aspects Of The Loan
The monthly payment is the best indicator of how the car loan will impact your budget. It can give you a reality check on whether you can afford the vehicle. And though this figure is the easiest to understand, it isn’t the only number to be aware of.
It is also important to be aware of how much the loan will total, how much of a down payment you’re making, and how long the loan will be. The general rule for each of these is as follows:
Your loan payment should be no more than 15% of your take-home pay. The loan term should ideally be less than 72 months, and you should aim for a down payment of at least 10% or consider GAP insurance.
Keep in mind that everyone’s situation will be different, so these recommendations are not set in stone. Furthermore, these figures will differ for those who lease, so take a look at our articles for information specific to that scenario.
When you obtain a monthly payment, be it from a price quote, negotiation or advertised special, make sure you are aware of all the numbers behind it. What good is a low payment if it takes you 84 months to pay off the loan? Is the selling price for the car a good deal? What about the trade-in amount the dealership is offering for your car? Ask for the “out-the-door” figures from your salesperson and review them before making a decision.
How To Use Credit Karmas Auto Loan Calculator
A car could be one of the biggest purchases youll ever make. Thats why its important to understand how various factors can affect how much you pay to finance a car.
Whether youre just starting to shop for a car or are ready to finance a particular make and model, getting a sense of your monthly loan payment can help with your decision.
Our calculator can help you estimate your monthly auto loan payment, based on loan amount, interest rate and loan term. Itll also help you figure out how much youll pay in interest and provide an amortization schedule .
Keep in mind that this calculator provides an estimate only, based on the information you provide. It doesnt consider other factors like sales tax and car title and vehicle registration fees that could add to your loan amount and increase your monthly payment.
Here are some details on the information you might need to estimate your monthly loan payment.
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Example: Using The 20/4/10 Rule To Calculate How Much Car You Can Afford
Molly earns $80,000 per year, before taxes and is interested in buying a car. Her monthly salary before tax is $6,667. Molly plans to use the 20/4/10 rule to buy a car that fits her budget and still allows her to comfortably afford her other monthly expenses.
According to the 20/4/10 rule, she calculates that 10% of her $6,667 monthly salary is $667 per month. She then estimates how much shell have to spend per month on car insurance, gas and maintenance like this:
|Total cost of car-related expenses:
If Molly can only spend $667 per month on all car expenses, and has to spend $425 of that on car insurance, gas and maintenance, then the maximum amount she can afford to spend on car loan payments is $242 per month .
Molly starts looking around for cars, and finds a 2017 Toyota Camry at a used car dealership for $13,000. Using the 20/4/10 rule, shell have to put a 20% down payment on the car $2,600 in this case which she can pay out of her savings.
She then compares auto financing offers for the remaining $10,400 cost of the car . Because of her excellent credit score, shes offered a 4-year loan term at a 4% interest rate. Her monthly car loan payments would then end up being $234.82.
That means Molly will be spending a total of $234.82 + $425 = $659.82 per month on all of her car-related expenses, which is within her budgeted amount of $667.
How Much Should You Spend On A Car Payment
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What Is An Upside
An upside-down car loan is one where the balance of the loan is higher than the value of the car. This can happen because you take out a large loan to buy a car that depreciated quickly, due to accidents that damage your car, or if you trade in your car too early. If you sell your car when you have an upside-down loan, you won’t make enough to pay back your balance.
How To Get The Best Deal
Got new car fever? Well, first, you need to do a little homework. With the internet, the mystery of the automobile buying process has been unveiled and you can be a well-informed buyer ready to negotiate for the best price. First of all, go to ConsumerReports.org to check out vehicle reliability. You may be eying that shiny red sports car, but if its review states that this manufacturer has a history of poor performance or something like electrical issues, you may want to reconsider.
Test drive the vehicle you have in mind, but renting one from a car rental company for a couple days is the ultimate test.
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Dealership Financing Vs Direct Lending
Generally, there are two main financing options available when it comes to auto loans: direct lending or dealership financing. The former comes in the form of a typical loan originating from a bank, credit union, or financial institution. Once a contract has been entered with a car dealer to buy a vehicle, the loan is used from the direct lender to pay for the new car. Dealership financing is somewhat similar except that the auto loan, and thus paperwork, is initiated and completed through the dealership instead. Auto loans via dealers are usually serviced by captive lenders that are often associated with each car make. The contract is retained by the dealer but is often sold to a bank, or other financial institution called an assignee that ultimately services the loan.
Direct lending provides more leverage for buyers to walk into a car dealer with most of the financing done on their terms, as it places further stress on the car dealer to compete with a better rate. Getting pre-approved doesn’t tie car buyers down to any one dealership, and their propensity to simply walk away is much higher. With dealer financing, the potential car buyer has fewer choices when it comes to interest rate shopping, though it’s there for convenience for anyone who doesn’t want to spend time shopping or cannot get an auto loan through direct lending.
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Hit Calculate To See What Your Monthly Car Payment Would Be
Youll see three results:
What your monthly car payment would be:
Dont forgetthis is what youd pay every single month for the entire loan term. And with the average new car payment at $576 for almost 70 months, that’s thats a really long time to pay on a car before you own it.2 Whew!
What youd actually pay for the car:
Remember what we said about interest rates? This number represents the all-in price of the car because of them.
How much interest youd pay during the term:
This shows you how much of your all-in price isnt even going to the car. Its money youre paying the lender just for the privilege of borrowing their money.
If you want to play around with your results, just use the sliders to change the numbers. Adjust the slider on the car price to see how your monthly payment raises or lowers. Or you can adjust the slider on the results to see how the car price changes.
The 20/4/10 Rule To Calculate How Much Car You Can Afford
The 20/4/10 rule is a handy guideline to go by when buying and budgeting for a car. This rule states that you should put down 20%, obtain a loan term no longer than 4 years, and keep monthly car payments at or below 10% of your monthly pre-tax income.
Make a 20% down payment
As soon as you drive a car off the lot after purchasing it, you lose money to depreciation. This is why a down payment of around 20% is recommended. For example, you should have $2,000 for a car worth $10,000 or $6,000 for a car worth $30,000. Start saving for your down payment as soon as possible. By making a down payment, youll reduce the risk of incurring negative equity which is when you owe more against the car than what its worth.
Keep your loan term to 4 years or less
Car loan terms usually range anywhere from 2 to 7 years. However, you should aim for a 4-year term or less. The longer your term is, the more interest youll pay. By shortening the term, youll reduce the costs of financing. In addition, longer loan terms can have a negative impact on your car insurance costs. You can compare car loan terms and interest rates from a range of lenders in the table below.
Spend no more than 10% monthly on all car expenses
- The 20/4/10 rule is meant to be a guideline, not a strict rule. If you can only afford to put 15% down or need to extend your car loan to a 5 year term, thats okay.
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Is It Better To Make Car Payments Or Pay In Full
Financing a car may be a good idea when:You want to drive a newer car you’d be unable to save up enough cash for in a reasonable amount of time. The interest rate is low, so the extra costs won’t add much to the overall cost of the vehicle. The regular payments won’t add stress to your current or upcoming budget.
Try Our Calculator For Yourself
If youve learned anything today, we hope its that its important to weigh all factors when buying a vehicle, either new or used. Our car financing calculator will be a great tool to help you plan your next vehicle purchase.
It can help determine how much money you want to put down . Based on how much your trade-in value is, it can be a great help when deciding what kind of term you want to choose. Note: some interest rates are term-specific, so even if your credit history says you can get 1.99% interest, for example, you may have to choose a certain term length in order to qualify for that interest rate.
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How Do I Calculate A Car Payment
Many factors go into a new or used car payment. But its easy to estimate a car payment by using the Autotrader car payment calculator. It incorporates all the factors you will need to calculate the payment on the vehicle you want to buy, including loan amount and terms plus interest. Our guide on the topic breaks down more helpful information about what you need to know when determining your car payment.
Calculate How Much Down Payment You Can Afford
A down payment is money you pay toward the vehicle sale price before taking an auto loan. So when you purchase a $15,000 car and put $1,500 down, for example, you’ll need to finance $13,500. Because the amount you put down will change how much you need to borrow, knowing what you can afford to put toward a down payment in advance will help you gauge how much your future car payment will be.
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Early Auto Loan Payoff Calculator Faqs
What is a pay-off car loan early calculator?
A pay-off car loan early calculator is a calculator that helps you know how much time you can shave-off from your car payment and the interest you can save by increasing your monthly car payments.
How will an auto loan calculator help me with extra payments?
Auto loans that span for a long period are great, but they accrue a lot of interest to be paid over time. Our auto loan calculator will show you just how much you can save on these interests by making extra monthly payments.
How do I find out my car loan amortization schedule with extra payments?
You can get an idea of your amortization schedule when you use our auto loan early payment calculator. You will be shown just how much you’ll be owing at any period in the life of the loan for both regular payments and accelerated payment plans that use extra payment.
Is there a ‘remaining car loan payoff calculator’?
Yes, there is a remaining car loan payoff calculator. This auto loan early payment calculator provides you with accurate information about how much money you still have to pay off on a car loan. You will, however, need to supply details on the loan amount, period, and extra payment.
How to pay off car loan calculator faster?
How to pay off a car loan early using a lump sum calculator?
How fast can I pay off my car loan?
When will my car be paid off?
How to determine the payoff amount on my car loan?
What about car loan amortization calculators with extra payments?
Calculate The Car Loan Amount You Can Afford
Now that youve calculated your affordable monthly car payment amount, you can get a sense of how much you can borrow. This will depend on several other factors, including:
Your credit score, which will in part determine your annual percentage rate, or APR, on the loan.
Your loan term, or the number of months you have to pay off the loan.
Whether you buy new or used. New car loans tend to have lower APRs.
With a monthly payment, an estimated APR and loan term, the car affordability calculator works backward to determine the total loan amount you can afford.
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Alarming Car Buying Statistics
Auto loans over 60 months are not the best way to finance a car because, for one thing, they carry higher car loan interest rates. Yet 39% of new-car buyers in the first quarter of 2021 took out loans of 61 to 72 months, according to Experian. More alarmingly, Experians data show 32% of car shoppers are signing loans for between 73 and 84 months thats from six to seven years.
To close the deal, need to offer a payment that is comfortable, Weintraub says. Instead of reducing the sale price of the car, they extend the loan. However, he adds, most dealers probably dont reveal how that can change the interest rate and create other long-term financial problems for the buyer.
Used-car financing is following a similar pattern, with potentially worse results. Experian reveals that 42.1% of used-car shoppers are taking 61- to 72-month loans, while 23% go even longer, financing between 73 and 84 months.
If you bought a 3-year-old car and took out an 84-month loan, it would be 10 years old when the loan was finally paid off. Try to imagine how youd feel still making loan payments on a 10-year-old car.
Long loan terms are yet another tool the dealer has to put you into a car because they focus you on the monthly payment, not the overall cost. But, just because you could qualify for these long loans doesnt mean you should take them.