How Much Car Can I Afford?

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Shopping for a new car can be really exciting. When you’re shopping for a used car there are so many great choices. You can shop for cars with great fuel efficiency, the latest gadgets, sunroofs, turbocharged engines, and a thousand other features. But, at the end, you have to make sure the car you love is also a car you can afford.
Unless you’re paying cash for your used car, you’re going to need to borrow money: Most likely from a bank or credit union. Knowing your current expenses and figuring out how much you can afford to pay each month for your new car is a key consideration.

We have some simple steps to help you estimate your car payment and make sure it’ll comfortable fit in your monthly budget for a couple of years.

Step One—Planning your Budget

It’s not as much fun as the test drive, but sitting down in the driver’s seat of your budget is the best place to start. Before you let your heart fall in love with your dream car let your brain set some ground rules. Planning a budget for your used car purchase before you start shopping around can help you avoid disappointment and problems down the road.

For most of us, after a mortgage or rent, buying a car is one of the biggest expenses in our lives. To calculate how much you have available to spend on your car payments first take into account your essential monthly expenses. Start with your monthly income and deduct your expenses.

Example You
Monthly Income $4,000
Mortgage/Rent -$900
Utilities -$200
Phone -$60
Food & Entertainment -$580
Savings -$200
Other Expenses -$225
(Disposable Income)


The total from this worksheet, your disposable income, is the amount you have left to cover the cost of your new car. Remember, though, you don’t want your car payments to stop you building up a nest egg or having a bit of fun on the weekend.

If your gross pay is $4,000 a month and you spend $2,165 on essentials like mortgage, food, and utilities, your disposable income is $1,835 a month ($4,000 – $2,165 = $1,835). Spending 10% of your disposable income would mean a $184 car payment. 20% of this would give you a car payment of $368.

You probably don’t want to spend more than 10 – 20% of your monthly disposable income on car payments.

Step Two—Finding the Best Loan

debt to income

Are you keeping this in balance? Image: Simon Cunningham

Now that you know how much you can afford, you’ll need to find the best place to borrow the money. The great news is that there are literally thousands of places to find a loan for your used car. The trick here, though, is getting the right loan with the best interest rate possible.

Two factors are going to have the biggest impact on your monthly payment:

  1. Your personal credit score
  2. The length of the loan

For most of us, after a mortgage or rent, buying a car is one of the biggest expenses in our lives.

If you haven’t recently, take a moment and check your personal credit score. It’s quick and easy. Under United States law you are able to access your credit report from the three major reporting bureaus each year for free.  As you start your search for a loan make sure the information contained on the credit reporting bureaus reports is accurate. Inaccuracies can have a huge impact on the loans available to you and the interest you pay.

Unfortunately, however, you may find that your credit rating has been hurt by past problems or delinquencies. This could mean you’re going to have to pay more in interest on a loan, which may lower the amount you can afford. But you still have options and you still may be able to afford a good, reliable used car.

You’ll also have options for the amount of time you’ll have to pay back your loan. You can spread your payments over a longer period, sometimes as long as six years. Spreading the payments may lower your monthly payment, but it will make the total cost of the car much higher over the long term. As you calculate how much car you can afford, you’ll want to consider the total cost of the loan payments, including the finance charges, over the entire length of the loan.

Step Three—Total Cost of Ownership


Image: Abacus by Steven Depolo

One of the final things to consider as you determine how much car you can afford is the cost of all the other things that come with car ownership: fuel costs, routine maintenance, property taxes, potential repairs, insurance, and parking fees. These factors can have a significant impact on the total cost of the vehicle.

For example, a small vehicle that gets great gas mileage may have lower fuel costs, but it may cost more to insure. If you live in an urban area or a community that charges for a parking permit, parking fees could add up quickly. And, unfortunately, there’s always the potential for the unplanned repair bills, flat tires, and parking tickets. The best way to avoid getting in a jam over these is to consider them as you determine how much car you can afford.

(Tip: you can make this easier on yourself by using an online percentage calculator.)

Step Four—Avoid Costly Hidden Problems

When all is said and done make sure you get the most car you can for the money you can afford. After you find the car of your dreams, and are confident it fits well within your budget, you’re going to want to avoid any costly hidden problems. All that planning and hard work will be for naught if you end up buying a rebuilt wreck or a car that’s had its odometer rolled back. Before you part with your hard earned money do your homework about the car’s history and get it checked by a mechanic.

Finally, have some fun. You’ll be able to head down the highway with confidence, and have a little extra money to enjoy the ride.

Do you have any tips or questions about how much you can afford to spend on car payments? Share them in the comments! We may use your idea or question in a future article.

Featured image by Tim Patterson

By | 2018-02-13T20:58:25+00:00 August 14th, 2014|Car Buying|1 Comment

One Comment

  1. Alisa Hill August 28, 2014 at 2:17 am - Reply

    While buying a car, you should:
    1. Calculate what 36 percent of your gross monthly income is.
    2. Itemize and total all your monthly payments, including your mortgage or rent, credit-card bills, and other installment loans.
    3. Subtract the total of your monthly payments from the 36 percent figure.

    In addition to the vehicle’s price, you also need to consider other costs, such as:

    Sales tax
    Registration fees
    Insurance premiums

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