How much car can I afford?

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If you want a new car, you need to calculate how much new or used car you can afford.

But calculating affordability goes beyond negotiating down the sticker price and figuring monthly payments. You also have to take into account other costs like insurance premiums, repair bills and gas mileage.

Determining affordability requires finding a balance in terms of meeting your vehicle needs and staying within your budget.

How to calculate how much car you can afford

Unless you’re using cash to buy the car outright, you’ll have to finance the car with a loan. And determining whether you can afford the car comes down to whether you can make the monthly payments.

Yearly and monthly budget calculations provide a high-level overview of how your money works in the bigger picture of your financial life. Adding in the cost of a vehicle purchase impacts both your monthly cash flow and the way lenders view your creditworthiness.

One common affordability measure, according to personal finance experts, is that your car costs not exceed 10 percent of your total household budget. For example, if your total monthly budget is, say, $5,000, your car payment should be no more than $500.

Using this calculation, the more cash flow you have each month to pay bills, the more car you can afford. For example, 10 percent of a $3,000 monthly budget buys a much different vehicle than 10 percent of a $15,000 monthly budget. A $1,500 per month lease budget, for example, will get you behind the wheel of a 2020 Porsche 911 Carrera Coupe, while a $300 payment will allow you to drive off the dealer’s lot with a VW Atlas Cross Sport.

In general, other experts say that a car that costs roughly half of your annual take-home pay will be affordable, according to Edmunds. They also caution that all auto expenses, which include insurance and maintenance, should not exceed 20 percent of your pretax monthly income.

When it comes to value and affordability, 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. Basically, you need to compromise and buy or lease the car that best fits your budget.

To determine affordability, lenders will also 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. For example, if your gross monthly is $7,500, all your monthly bills — including mortgage, car loans, minimum credit card payments — must be somewhere between $3,375  and $3,750.

Use a car loan calculator

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 income and expenses. This underscores the difference between buying something in cash (and possibly eating into or wiping out your emergency fund), and paying for something affordably over time.

As many car buyers take out loans for their purchases, 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.

So, start by pulling a copy of your credit report, and find out your credit score, to gauge if lenders see your credit as excellent, good, fair or bad.

Next, add in your car down payment. The average down payment ranges from 10.5 percent of the car’s price up to 20 percent.

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

Calculators are often set up with an average interest rate. The rate decreases if your credit score is strong and increases if it’s poor.

Determine your budget

Before you start car shopping or inquiring about financing, fine-tune your budget to help you decide how much you can afford to spend on a new or used car.

Another simple way is to figure out how far your monthly paycheck will take you. If you’re basing your budget on your take-home pay, tally up all of your monthly expenses (including your estimated new car payment) and subtract that by your monthly pay. By using the amount you’re left with after taxes, you know how much in car costs you can add to your monthly expenses.

But before you purchase the 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, maintenance and insurance.

Scale back your monthly car payment if you already have a lot of debt or high monthly costs.

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.

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 fewer gallons you buy at the pump, the more money you save.

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