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How much car can I afford? How to calculate car affordability

Toy cars
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Toy cars
Darren Baker/Shutterstock
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How much car you can afford depends on factors like your monthly income, your credit score and how many add-ons you want to include in your purchase. Experts typically recommend spending no more than 20 percent of take-home pay on a car —  including the cost of car payments, fuel, insurance and more. Determining affordability requires finding a balance between meeting your vehicle needs and staying within your budget.

How to determine how much car you can afford

A vehicle is often one of the most expensive purchases people make, so it is critical that you crunch the numbers to determine whether you can truly afford the car you’re considering. And remember, the true cost of a vehicle goes well beyond the sticker price or monthly loan payments. Ongoing costs like fuel, maintenance and car insurance can vary significantly based on the type of car you purchase and should also be factored into your budget.

Get an initial figure by using a car loan calculator

The interest rate you receive on an auto loan plays a big part in calculating your monthly payment amount. A higher credit score will score you a lower interest rate, which will ultimately lower your monthly payment and your total overall loan cost.

You can use a car loan calculator to determine how different interest rates will affect your monthly payment. Here is how:

  • Pull a copy of your credit report and find out your credit score.
  • Get prequalified with a few lenders to determine the average interest rate you could be offered.
  • Plug in your interest rate, desired repayment term length and car price to the calculator.

The loan term is the second factor you should consider. A shorter loan term means bigger payments, but less interest paid overall. So, while a long loan term can be tempting, it may be better to go with a less expensive vehicle to keep payments affordable.

Bankrate insight
Use a car loan calculator to get an idea of what your monthly payments will be before you complete a full auto loan application.

Use a cost-to-own tool

Beyond monthly payment, you should consider if you can afford to maintain the vehicle. Get a few car insurance quotes and use a cost-to-own tool to see estimates of what you might pay.

Both Edmunds and Kelley Blue Book have cost-to-own tools that take into account expected fuel costs, maintenance, repairs and state fees — along with average depreciation. By comparing cars like this, you can check the long-term affordability of a vehicle before you finance it.

Three more factors to consider

While a car loan calculator and cost-to-own estimate are good starting points, there is more you should account for. Consider your salary, additional vehicle costs and if you plan to lease or buy.

1. Your salary

Your salary is the primary factor in determining which car and auto loan is best for you.

  • Edmunds recommends that a new-car payment should be no more than 15 percent of your take-home pay each month.
  • A used-car payment should be no more than 10 percent, but that number varies by expert.
  • When insurance, fuel and other regular monthly expenses are included, the cost should not exceed 20 percent of your monthly take-home pay.

Your income also matters if you are trying to get approved for a loan. Lenders will look at your debt-to-income ratio, or DTI. This measure compares your monthly bills to your gross monthly income. Most car dealers like to see a DTI no higher than 45 or 50 percent before approving a loan, according to The Car Connection.

Even if you have the cash available to pay for your car outright, you should still consider your purchase in the full context of your annual salary and expenses. Specifically, weigh buying something in cash — and possibly eating into or wiping out your emergency fund — versus paying for something affordably over time.

2. Additional vehicle costs

When it comes to affordability, factor in other monthly costs related to car ownership. Two of the largest additional costs that come with car ownership are fuel and insurance costs.

You can use to search for mileage estimates for your car of choice. Selecting a car with good gas mileage will save you money each month and could help you maximize any employer mileage reimbursements.

Insurance costs also vary by vehicle and individual. Two cars that look similar to you might be vastly different to your insurance company. A car insurance calculator is a great place to start understanding what your potential insurance costs will be and what factors the insurance company will consider when developing their price quote. Typically, companies will evaluate:

  • Your driving record.
  • How much you use your car.
  • Your location.
  • Your age.
  • Your gender.
  • Your credit.
  • The type and amount of coverage you selected.
  • The discounts you qualify for.

Depending on the state you live in, there may be restrictions on what insurance companies can use when pricing your auto insurance.

3. Leasing versus buying

Understanding the financial implications of leasing or buying a car is a helpful consideration when deciding how much you can afford to spend.

Leasing is a great option for drivers who want a lower monthly payment and the ability to drive the newest model cars. It can keep your month-to-month costs affordable, and you only pay for a portion of total depreciation. However, you still need to put money down — and costs of repairs and maintenance will be on your shoulders for a car you ultimately will not own.

Buying places you fully in the driver’s seat with none of the mileage limits or additional charges for potential wear and tear that are typically associated with leases. It will cost more to buy a car than to lease it, and you will need to ensure depreciation won’t leave you upside-down on a loan. But overall, you will own the car and be able to sell it if needed.

Take advantage of a leasing versus buying calculator to calculate your potential savings. What is affordable comes down to how you plan to use your vehicle, so read up on the full benefits and drawbacks of each before you commit.

The bottom line

Being realistic with your budget will ensure that you won’t have to pinch pennies once you bring your new ride home. Before settling on a car, consider all of the potential costs, not just monthly payment. When calculating all of the expenses, aim to find a car that costs no more than 20 percent of your take home pay.

The goal is to find a car that meets your expectations and allows you enough breathing room financially to accommodate any unforeseen costs or reduced income.

Learn more

Written by
Rebecca Betterton
Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to purchase a car.
Edited by
Student loans editor
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