Finding A Car You Can Afford
Many automotive sites, such as Kelley Blue Book, Edmunds and AutoTrader, have car finder search tools to show you different models listed by price. But remember to set the bar low. When searching for cars, set your maximum price below the total loan amount you think you can afford. Sales tax and fees can easily add up to an extra few thousand dollars.
About the author:Philip Reed is an automotive expert who writes a syndicated column forNerdWallet that has been carried by USA Today, Yahoo Finance and others. He is the author of 10 books.Read more
Estimate Costs For Gas And Insurance
Will the price of insurance and gas go up or down when you buy a newer car? If you anticipate changes, make sure to add them to the simple budget you created in steps 1 and 2.
Heres a good example:
Lets say you earn $1,000 every payday for a monthly take-home pay of $4,000.
Heres how your expenses look once you add them up:
- Rent: $1,200
- Savings: $400
- Total: $3,510
In this scenario, you should have around $490 left over to spend on a car each month. Thats how much you could spend, but not necessarily how much you should spend.
What Can I Afford Calculator
Includes mortgage default insurance premium of $
A maximum purchase price that is over $1,000,000 will use 20% minimum down payment for illustrative purposes, however a higher percentage may be required by your lender. Speak to your lender for exact amount.
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Important Tips When Buying A New Or Used Car
While the above guidelines make it possible to find out how much car you can afford, that doesnt mean that number should be your actual budget. If you want even more freedom in your monthly expenses, you should strive to spend less on a car than you can afford to spend.
Here are some tips that can help:
Auto Loan Calculator: See How Much You Can Afford
For most consumers, buying a vehicle comes down to calculations:
- Whats the monthly payment?
- Will the car hold its value?
- What will it cost to insure?
- What are its gas-mileage projections?
And, above all: Can I Afford it?
To work out the last and most important of these considerations, weve provided an auto loan calculator. It offers everything you need to pinpoint your ballpark payment schedule, based on four variables:
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Buying A Car: How Much Car Can I Afford
Before setting your sights on a new ride thats out of reach, determine the answer to a crucial question you should be asking: How much car can I afford?
How much to spend on your next vehicle depends on many factors, with one of the main ones being price. This guide outlines the costs that make up your car payment, helps you determine the amount you can spend each month, and how to calculate a price range for shopping within your budget.
Next: See How Much You Can Borrow
You’ve estimated your affordability, now get pre-qualified by a lender to find out just how much you can borrow.
What will your new home cost? Estimate your monthly mortgage payment with our easy-to-use mortgage calculator.
- Award Ribbon
Use our VA home loan calculator to estimate payments for a VA loan for qualifying veterans, active military, and military families.
- Dollar Sign
Your debt-to-income ratio helps determine if you would qualify for a mortgage. Use our DTI calculator to see if you’re in the right range.
- Pig Refinance calculator
Interested in refinancing your existing mortgage? Use our refinance calculator to see if refinancing makes sense for you.
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Test Drive Your Car Payments
If you can hold off from buying a car for a few months, its a good idea to test out your monthly payments.
For example, if your car payment will be $800 per month, take that amount, and put it into savings instead. If you can make timely payments on your other bills, and still put food on the table, then its safe to say that is an appropriate monthly payment for you to handle. Plus, thats more money you have in the bank to go towards a down payment.
What Will A R350 000 Car Cost Me Monthly
To purchase a vehicle thats going to cost you R350 000, your monthly repayments will average around R7 000 per month. This means that you would need to earn around R35 000 per month to afford the car . Once youve paid tax on your monthly earnings, you will probably be left with around R21 000 after youve made your car payment.
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How Much Car Payment Can I Afford How To Budget For A New Car
Getting ready to buy a new ride? Thats great! But before you hit the dealership, there are a few things you want to consider first like how much monthly car payment you can afford. To give you an idea, your car payment should be less than ten percent of your take-home pay.
That might not sound like much, but before you get discouraged, understand that theres a method to the madness behind this car-buying rule. Heres what we mean:
How Much Is Too Much For A Car Payment
Whether youre paying cash or financing, the purchase price of your car should be no more than 35% of your annual income. If youre financing a car, the total monthly amount you spend on transportationyour car payment, gas, car insurance, and maintenanceshould be no more than 10% of your gross monthly income.
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Why Is My Amount So Low
Cars may be necessary transportation, but their quick depreciation means spending more than you have to on a car is a fast way to make your hard-earned money disappear unnecessarily.
A bank or car dealer will likely approve you for much more than your result on our calculator. But what the dealer says you can afford and what you can actually afford are very different. Remember, if you stop paying your car loan, the bank repossesses the car. Either way, they win.
The result of our car affordability calculator shows you a sensible amount to spend on a car. And yes, it might be far lower than you might think. But remember that the more money you spend on a car, the less money you have available for everything else housing, food, travel, entertainment, paying off debt, and saving.
Your car is one of your largest monthly expenses the lower you can keep that expense, the faster youll be able to build wealth in other areas.
Comparing Personal Loan Lenders
Before you drive into the sunset in your new ride, you’ll need to find a loan you can afford. Make sure to watch out for lenders with hidden fees, as these can eat into your budget. Not sure where to start? Our experts compiled a list of their favorite personal loan lenders.
What about the total purchase price of the car? The most prudent approach is to buy a car that costs no more than 10% to 20% of your annual income. Many consumers exceed that recommendation, but it’s best not to tie up too much of your money in a vehicle.
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Setting A Monthly Number
It might seem obvious, but the first step to figuring out how much you can spend on your new car is to calculate your monthly budget. Add up all your monthly income, subtract expenses , and see how much is left. For your benefit, the Federal Trade Commission even offers a sample budget sheet online.
But don’t dedicate every last penny of disposable income to a car. Instead, experts have developed some guiding rules for how much is reasonable to spend.
In the past, advisers sometimes recommended what was called the 20/4/10 rule: make a 20% down payment, have a loan lasting no longer than four years and don’t let payments exceed 10% of your gross income. But those figures aren’t realistic for today’s shoppers. In part that’s because car loans last much longer: In March 2020, the average auto loan surpassed 70 months, according to Edmunds research.
Today, experts generally recommend spending no more than 15% of your monthly take-home pay . Depending on your budget, spending closer to 10% might be a more reasonable guideline.
Based on those rules, somebody with a take-home income of $3,000 per month might consider a payment of $300 to $450 per month, figures that represent 10% and 15% of their take-home pay, respectively. If you’re not looking at a fancy SUV or pickup truck, that’s generally a good number when shopping for more affordable new cars.
What Does The 10% Rule Look Like
In hypothetical Jennys case, her $65,000 annual gross salary equates to $5,416 per month . The 10% rule for Jenny would mean she has $541 per month to pay towards ALL of her car expenses each month.
That means Jenny has $541 to pay for:
- Any maintenance and
- Her monthly car payment.
If Jenny had gone with the high car purchase from earlier purchasing a car at 45% of her salary would cost her $487 per month in just her car payment. Thus, she would only have $54 per month for everything else.
$54 for gas is hardly doable, let alone car insurance premiums and maintenance. In this case, the high car purchase would guarantee Jenny spends more than 10% each month on her car!
Here is a side by side comparison of the 10% monthly car expense rule using the car purchase 25% rule:
|Left Over for Gas, Insurance & Maintenance||$54|
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Factors That Impact Affordability
When it comes to calculating affordability, your income, debts and down payment are primary factors. How much house you can afford is also dependent on the interest rate you get, because alower interest ratecould significantly lower your monthly mortgage payment. While your personal savings goals or spending habits can impact your affordability,getting pre-qualified for a home loancan help you determine a sensible housing budget.
What Is The Minimum Down Payment For A Car
As a general rule, aim for no less than 20% down, particularly for new cars and no less than 10% down for used cars so that you dont end up paying too much in interest and financing costs. Benefits of making a down payment can include a lower monthly payment and less interest paid over the life of the loan.
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Buying From A Dealership
Todays car shopper is tech-savvy, and so are the dealerships. More car buyers are walking into dealerships with an exact car in mind because they have already visited the dealers website and scoured the inventory to find the right vehicle.
In other words, consumers now have more choices and control, from budgeting to vehicle shopping to find the right dream car that also fits their personal financial profile.
Affordable Monthly Car Payments
Most car purchases start as an idea, and end with the question, How much can I afford monthly for a new car?
Ideally, the best rule to follow when buying a car is the 25% gross salary rule, since it is 100% based on what you make each year. However, that doesnt necessarily help you when it comes to your monthly car payment.
For that, its best to use the 10% number from the 20-4-10 car buying rule .
The 10% number refers to making sure that no more than 10% of your gross monthly income goes towards your automobile costs. The standard monthly car costs include:
- Your auto payment
- Car maintenance
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Focus On Your Credit For Long
If you’re buying a car now, there are plenty of things you can do to save money. In the long run, though, the best thing you can do to save on credit is to improve your credit scores. Along with making payments on time and limiting your debt, consider using Experian Boost, which may be able to improve your FICO® Score by including your on-time phone and utility payments.
Building credit can take time, but your efforts can save you a lot of money long after you’re done paying off your current car loan.
Four Steps To Help You Nail Down A Monthly Payment You Can Afford
Like it or not, its up to you to figure out how much you can truly afford to spend on a car. No matter what, dont leave it up to your sales guy to decide how much you can borrow.
Why? Because, according to their facts and figures, your credit and income may qualify you to buy just about anything on the lot.
True affordability is never dictated by lenders or big banks. At the end of the day, only you know how much you can afford to spend on transportation and your other bills.
So, how do you determine how much you can afford?
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The Three Rules Of Car Financing
The rule of thumb when it comes to smart auto financing is the 20/4/10 ratio.
According to this rule, when buying a car, you should put down at least 20%, you should finance the car for no more than 4 years, and you should keep your monthly car payment at or below 10% of your gross monthly income.
Why is the 20/4/10 ratio smart? Heres why:
Your Monthly Payments Should Be Less Than 10
To get the best car you can realistically afford given your salary, we recommend your monthly payment should be less than 10-15% of your earnings after taxes . If you dont know this number off hand, you can calculate it using neuvoos Canadian income tax calculator.
Lets walk you through some examples.
Say you make $45,000 gross per year and you live in Manitoba. Your yearly net pay after tax deductions comes to roughly $33,843. This is your take-home pay.
15% of your total take-home pay comes to $5,076.45, which equals $423.04 per month. This means if you make $45,000 a year, you can spend around $423 per month on car payments. Keep in mind, this doesnt include a down payment and if you had one, that number would change. That 15% also doesnt include car insurance, gas or routine maintenance. This is where the 20% rule comes into play.
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How Much Do You Have For A Down Payment
Your down payment affects the amount you can borrow to buy a home and the size of your payments. This will impact your monthly budget.
You must have at least 5% for a down payment if the home purchase price is less than $500,000.
If the home purchase price is between $500,000 and $999,999.99, you must have at least 5% for the first $500,000 and 10% for the remaining amount.
For home prices $1 million or over, the down payment must be 20%.
If you are a first-time home buyer, you can borrow up to $35,000 from your RSP towards your down payment.1
1. First time home buyers can withdraw up to $35,000, in a calendar year, from their RSPs for a home purchase . They then have 15 years to repay their RSP . Find out more about the RSP Home Buyers’ Plan.
Step 5 of 6
How Much Car Can I Afford
Buying a car should start with a budget. Yeah, I know, a budget sounds boring, but it serves as your guiding light to know how much you can afford when buying a car. It will also determine whether to buy new or used and how youll pay for it. Its the starting point to help make a difficult decision easier.
If youre financing your purchase, the rule of thumb, according to money and car experts alike, is the 20/4/10 ratio. Heres how it works:
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Assess Your Extra Cash For Down Payment
The down payment for a car is the cash out of your pocket. While there are some auto dealers and lenders who will offer zero down payment financing, its better to put down some cash to help cover the fees and taxes at closing, and/or to reduce the loan amount. Putting some cash down will also shorten the overall length of the loan.
For example, lets say your budget is $20,000 and you found a vehicle at that sales price. If you borrowed $20,000 at 4% APR and paid the vehicle off over 60 months, your monthly payment would be about $368. At the end of 60 months, you will have paid $22,100 total, including $2,100 in interest.
If you had a $3,000 down payment, your monthly payment would drop to about $313 and the total loan plus interest for the life of the loan would be only $18,785.