How much car can I afford to buy?
Based on my monthly income, can I afford the car I want?
This is a common question but doesn’t have a set answer.
The answer depends on the following factors, assuming you will use an auto loan to pay for your vehicle:
- price of the vehicle, including tax and other costs
- cost of full-coverage insurance, as required by your lender
- your monthly income, after taxes
- your monthly expenses
- your credit score (affects the amount you can borrow)
- the amount of down payment you can afford
Some experts say that your car payments shouldn’t be more than 20% of your take-home pay. Others are more conservative and say 10%.
If you use the above rule of thumb, and let’s say your monthly after-tax income is $3000, you could afford either a $600 or a $300 car payment, depending on which experts you go with. Let’s split it and say $450 is the amount.
The reason we backed off the 20% figure is that there are other monthly costs to owning and driving a car — insurance, gas, maintenance, and possibly parking and tolls. All these costs come with the car but are easy to overlook.
So, how much car can I buy with a $450 monthly payment?
We’ll use an online Auto Loan Calculator, such as the one we offer on this website, to determine the maximum price of a car you can afford to buy, based on monthly loan payments — by working backwards.
We’ll start by assuming a $24,000 car price, a $1000 down payment, 48 month term, and a 5.5% APR loan interest rate, which is reasonable for someone with good credit. Plug the number into the calculator, hit the Calculate button, and you see the resulting monthly payment of $534.90, which is a bit high for our budget.
The calculator seems to indicate that we can’t afford a $24,000 car with a $450/month budget. However, there are some things we can do:
- reduce the price of the car
- increase our down payment amount
- increase the loan term months
- decrease the interest rate, assuming we can get such a rate
We’ll keep the $24,000 price for the car but try increasing the down payment to $2000. Let’s see if this gets us a lower payment:
Unfortunately, simply increasing the down payment doesn’t quite get us to our goal of $450. So let’s take one more step — go back to $1000 down payment and increase the length of the loan from 48 months to 60 months.
It appears that we’ve hit on a car price, $24,000, that we can afford, assuming the down payment, loan term, and interest rate we’ve chosen.
As you can easily see by using the calculator, we could afford an even more expensive car with the same $450 monthly payment if we make a larger down payment (or have a trade vehicle), extend the loan term, or find a lower interest rate.
For online auto loans, we recommend Auto Credit Express, especially for those with credit issues. Your local bank or credit union is also a good loan source if you have good credit.