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How much can I afford to spend on a car?

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You want a car, but you want to know how much new or used car you can afford.

If you're paying cash, you've probably got a figure in mind, but if you're looking to finance it, the decision becomes more complicated.

Before you start car shopping or inquiring about financing, take these 3 steps to help you decide how much you can afford to spend on a new or used car.

1. Calculate your monthly take-home pay

"If you're just kind of looking at your budget, the general advice we've been giving is that you're automotive budget should be no more than 20% of your take-home pay," says Ronald Montoya, consumer advice editor with Edmunds.com.

But before you purchase the luxury car of your dreams, understand that that slice of your monthly budget should include not only your monthly car payment but all of your auto-related expenses, including gas, oil, car maintenance and car insurance, he says.

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Scale it back if you already have a lot of debt or high monthly costs. And just because you can afford a certain number doesn't mean it's the right price for you.

"I would never recommend anyone shop at the top of their budget anyway," Montoya says. "Try to stick to the bottom, because you never know what's going to come up.

"You want something that's going to be a comfortable payment so that you have some breathing room in case those emergencies come up," Montoya says.

2. Factor in your credit

Unless you're paying cash, your interest rate is a big factor in just how much new or used car you can afford. Still, you can get an idea of the rates you'll be offered.

First, pull a copy of your credit report or credit score. Since you just want a general estimate, Is your credit good, bad or average?

Next, add in your car down payment. The average down payment is about 10.5% of the car's price, Montoya says. But conventional wisdom is to pony up 20%, he says.

Now, plug your numbers into Bankrate's car loan calculator.

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Calculators are often set up with an average interest rate, Montoya says. The rate will decrease if your credit is strong or increase it if it is weak.

Armed with that, you can calculate the range you want to pay for a new or used car.

3. Don't forget gas mileage

If your employer gives you a mileage reimbursement, you'll make your purchase more affordable by selecting a car with good gas mileage, says Andy Byron, senior financial adviser with HC Financial Advisors in Lafayette, California.

"You want to maximize that reimbursement," he says. "At that point, it becomes a question of: 'How do I maximize my miles per gallon?' "

One handy site to search for mileage estimates for your car of choice is fueleconomy.gov.

Even without a company reimbursement, gas comes out of your monthly budget. So, the less you buy, the more you save.

If you want to prevent a 2nd case of sticker shock, talk with your car insurance agent. Once you've narrowed your shopping list to a few types of cars, an agent will be able to tell you what each of your prospective choices would cost to insure.

Understand that 2 cars that look similar to you might be vastly different to your insurance company.

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Mitch Strohm

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