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Dear Terry,
Can we afford to buy a new car? If so, how much can we afford? We make $80,000 a year. Our take home income after taxes, benefits and 401(k) is $4,300 a month. Our mortgage, including taxes, is $1,060. We also have a student loan of $131 and a tractor loan of $306.
We don’t have any credit card debt, and our cost of living expenses are low, with utilities and all other bills totaling $750. — Hayley
Dear Hayley,
Determining exactly how much of a car loan someone can afford is tricky. It not only involves how much of your free cash you have to spend, but also depends on how comfortable a person is with debt. A car loan that keeps you awake at night — even though you can make the payments — isn’t a good deal.
That said, using your calculations, you have about $2,100 available after paying your monthly expenses. I would devote no more than 25 percent of that amount to a car payment.
Let’s say your car payment costs you about $500 a month. A payment of that amount would equate to a new car costing about $24,000, with no money down and a loan of 60 months at 7.59 percent.
Of course, you can adjust that number by putting a significant down payment into the deal. But I wouldn’t advise extending the loan beyond 60 months.
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