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

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How much car you can afford depends on your monthly income, your credit score and how many add-ons you’d like to include in your purchase. Experts typically recommend spending no more than 15 percent of your monthly take-home pay on the car itself and no more than 20 percent on the purchase as a whole — which includes your car payments, plus fuel, insurance and more. Determining affordability requires finding a balance between meeting your vehicle needs and staying within your budget.

How to calculate how much car you can afford

A vehicle is often one of the most expensive purchases people make, so it’s critical to determine whether you can make the monthly payments on an auto loan before you commit to a specific car. There are several factors to consider when calculating how much car you can afford, including your monthly cash flow and the way lenders view your creditworthiness.

Consider 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 and a used-car payment should be no more than 10 percent, but that number varies by expert. When you include insurance, fuel and other regular monthly expenses, Edmunds suggests not exceeding 20 percent of your monthly take-home pay.

Your income also matters if you’re trying to get approved for a loan. To approve you, 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’ve got the cash available to pay for your car outright, you’ll still want to consider your purchase in the full context of your annual salary and expenses. Specifically, you’ll want to weigh buying something in cash (and possibly eating into or wiping out your emergency fund) versus paying for something affordably over time.

Use a car loan calculator

If you’re taking out an auto loan, the interest rate you receive on the loan plays a big part in calculating your monthly payment amount. The higher your credit score, the lower the interest rate you’ll be approved for, which will ultimately lower your monthly payment.

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

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

Determine your fuel and insurance costs

And when it comes to affordability, don’t forget to 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. Not all cars are equal when it comes to these factors, so it is important to calculate these additional costs before signing off.

One site to search for mileage estimates for your car of choice is 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. The only way to know exactly what your insurance payment could be is to get quotes from a few companies, but a car insurance calculator is a great place to start understanding what your potential insurance company is looking at. 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.

The bottom line

The process of purchasing a new car is an exciting endeavor, but be realistic with your budget to ensure that you won’t have to pinch pennies while your new ride gathers dust in the garage. A new set of wheels isn’t worth purchasing if you can’t afford the general upkeep or monthly payments.

The goal is to find a car that meets your expectations and also falls into a monthly price range that allows enough breathing room for financial hiccups caused by unforeseen costs or reduced income.

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