How Much Car Can I Afford? (2022 Guide)

Calculator Use

Use this calculator to find out how much car can you afford to buy.

This calculator will calculate the total price of the car you might consider purchasing based on how much you can afford for a monthly payment. And, factoring in down payment and trade-in, calculates the loan amount and loan schedule you will need to make up any difference. This calculator should give you a rough idea of your car price range.  Once you are ready, you’ll need to get professional loan advice on your actual affordability.  Other factors include your credit rating and fees that you pay up front or roll into the loan.

Car Payments
The monthly amount you want or can afford to pay for a car loan
Car Sales Tax
How much tax will you be charged on this car price. Sales taxes by state
Down Payment
The amount of cash on hand you will be able to put toward this purchase and not borrow in the loan
Trade In Value
What will the dealer give you as cash value for any trade in vehicle you will be using in this transaction
Loan Term
How long will you take to pay back the loan in years or months?  What is the loan term?
Interest Rate
The annual stated rate of your loan.
Car Price You can Afford
This is likely the asking price of the car you can consider.
Car Loan Needed
Considering all of the factors you entered, this should be the actual loan amount you will need to apply for.

For a simple auto loan calculation use this car loan calculator. You can also create a table of payments if you want to investigate various loan options.

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Options for Financing a Car

There are several ways to finance a car purchase, including going through your bank, getting a loan from a dealership or using a third-party loan provider. We’ll explain each one in more detail below.

Bank or Credit Union

Traditional lenders like banks and credit unions generally offer lower rates or special deals for those who bank with them. If you have a good track record with your bank, it can provide you with a letter stating how much you are approved to borrow. You can then use the letter to buy a car or negotiate with other lenders to get a better deal.

Dealership

Most auto dealerships, especially those affiliated with manufacturers like Ford, Honda or Toyota, work with lenders that arrange car loans for qualified borrowers on-site. Some dealers also offer loans through national and regional banks that provide automotive financing.

When you sign on for a loan at a dealership, your monthly payments will be sent to the partner bank or finance company that backs your loan. Your vehicle’s title will be mailed to you once you’ve repaid the loan.

Third-Party Loan

A third-party loan offers a faster approval process than a standard auto loan and more flexible terms to fit your needs and help you get the vehicle you want. Buyers with bad credit who can’t get loans through traditional means may be able to find third-party auto lenders that are willing to loan them money.

The biggest drawback to using a third-party auto lender is the interest rate you’ll pay. Most third-party loan providers require higher returns on their money than traditional lenders like banks or dealerships.

Term of the Loan

It ought to go without saying that the shorter the length of your vehicle loan, the better. Yes, all other variables being equal, the longer you take to pay, the lower the monthly payments will be.

But other important factors to consider are the amount you’ll pay in interest on longer-term loans, how long you’ll be paying off your vehicle after its warranty runs out, and, because of depreciation, how long your loan balance will be higher than the value of the car.

Buying vs. Leasing: Generally, it costs more to buy a car than to lease one, but the upside is at the end of the purchase arrangement, you own something. At the least, if you’ve followed prudent advice on down payments and length of the loan, you will have equity in your vehicle if you get the new-car itch.

Leasing involves lower out-of-pocket monthly costs because you aren’t buying anything; you’re simply absorbing the vehicle’s depreciation during the term of the lease, plus interest (or rent) charges, taxes and fees.

Buying involves a down payment. Assorted upfront leasing costs can include the first month’s payment, a refundable security deposit, an acquisition fee, a down payment (for lower payments), taxes, registration, and other fees.

details other differences, but they all orbit a central theme: One way the vehicle is yours; the other way it still belongs to the dealership.

Buy, and the vehicle is yours, to have, hold, drive, customize and, ultimately, dispose of as you see fit.

Lease, and you have to return it essentially as you received it, plus allowable mileage. Think of it as getting a car from Hertz or National, just for a really, really long weekend.

What Car Loan Can You Afford?

The terms of your car loan will influence how affordable it is for you. One factor that can change a loan’s cost is the repayment term. Depending on the lender, typical loan terms range from 36 to 84 months.

As previously mentioned, choosing a longer repayment term may sound like a money saver because it reduces your monthly payment. But over time, you could end up paying a lot more in interest.

For example, let’s say you qualify for a $30,000 loan at 5%. If you choose a 60-month term and make no down payment, your monthly payment will be $566, and you’ll pay $3,968 in interest over five years.

If you opt for an 84-month period instead, it’ll drop your monthly payment to $424, but you’ll end up paying $5,617 in interest over the seven-year term—that’s $1,649 more that you could spend on things that are more important to you.

Another significant factor in the cost of your loan is its annual percentage rate (APR). The APR determines how much interest you pay on top of the principal amount of the loan. If you have excellent credit, you can generally expect to pay less in interest. If your credit needs some work, however, you could end up with a double-digit APR and thousands more in interest charges.

As such, it’s a good idea to check your credit score before you decide to buy a car. If you find that it’s not where you want it to be, and you don’t need to buy a car right now, consider taking some time to improve your credit before taking the next steps.

Planning

Your child’s education. Early retirement. Your forever home. No matter what your goals are, we have a wealth of educational tools and resources to help you.

Heres why your budget is lower than you were hoping

If your reaction to the Car Affordability Calculator was:

Bruh – that’s it? That’s all I can spend on a car?

Well, you wouldn’t be the first to feel that way. 

I, too, felt that way back at my first job. Everyone I worked with was driving shiny new Mercedes-Benz and BMWs to work, while my budget calculations said I could only afford a used Mazda, at best. 

I was making the same money as them, so… what gives

Why can’t I afford a new Hemi-powered Charger or Lexus crossover like seemingly everyone else on the road? 

The reality is that most Americans are driving cars that they can’t really afford. For the first quarter of 2022, Edmunds reported that the average new car loan term was a horrifying 70 months, with the average monthly payment reaching $648 for new cars.

This tells us that rather than considering a more affordable car, Americans are pushing out their car loan terms even farther, staying in debt longer, and simply paying way, way too much overall. 

Remember, you’re sticking to the 35% rule for several reasons:

  1. You can still get top-rated crossovers, sports cars, etc. for under $15,000.
  2. You won’t run the risk of going underwater.
  3. You’ll be able to invest all the money you save, enabling you to achieve financial independence much faster (and even buy a much nicer car!).

How to Calculate Total Costs

When you start shopping for your next car, it’s important to look at more than just the sticker price. If you live in a state that charges sales tax, for instance, expect that to add to the total cost of purchasing the vehicle.

Also, consider documentation fees, title and registration fees, and other expenses the dealer tacks on to the contract amount. If you choose to add a warranty or maintenance contract, that’s also going to affect whether you can afford the car.

You don’t have to pay these costs out of pocket—in general, dealers will roll them into the car loan along with the sales price of the car. But they will increase your monthly payment.

In addition to necessary taxes and fees associated with a car purchase, you’ll also need to think about the cost of car insurance, annual car registration, ongoing maintenance and repairs, fuel and other related expenses that go along with owning a car.

The bottom line

The process of purchasing a new car is an exciting endeavor but 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, including insurance, maintenance and fuel. 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

How much money should you spend on a car based on your salary?

The rule of thumb among many car-buying experts dictates that your car payment should total no more than 15% of your monthly net income, sometimes called your take-home pay (some might stretch this to 20%, but 15% is more conservative and therefore likely to make budgeting even easier). Your net income is the money you take home after federal, state and local income taxes have been deducted from your paycheck.

Note that this 15% is meant to cover just your car loan payment, and not ongoing car-related expenses like fuel, maintenance and insurance.

The idea behind the so-called 15% rule is that if you limit your monthly car loan payment — sometimes called a car note — to 15% or less of your net income, you’ll have enough money left over each month to cover the rest of life’s expenses, including the occasional financial curveball.

Should you pay cash or finance a car?

If you can afford to pay cash, should you? 

Here’s why financing is almost always better than paying cash

On paper, paying cash makes much more sense. You don’t have to worry about a monthly payment, you don’t pay a dime of interest, it’s one-and-done. 

However, there’s an opportunity cost to paying cash

If you write Carmax a check for $15,000, that’s now $15,000 that you can’t invest and multiply. 

To illustrate, let’s say you choose to finance instead of paying cash. You put 20% or $3,000 down, and set up autopay for your $300 monthly payment. 

That leaves you with $12,000 today to play with. 

  • You could put it in an S&P 500 index fund where it could become $30,000 in five years.
  • You could put it in your retirement account, where it could become $113,000 in 30 years.

As a general rule of thumb, it’s usually worth financing at a 2% interest rate or lower and stashing the cash in other places where it can grow much faster. As a cherry on top, financing with a low interest rate is better for your credit score

For ideas on where to invest your extra car cash, check out 7 easy ways to start investing with little money

Desired Monthly Payment

With serious consideration given to the length of the loan or lease, of course, the desired monthly payment is pretty much the total ballgame. It is the figure the dealership will target. It is the number that will be a fixed point in your financial world for the life of the loan or lease.

Things to consider beyond the monthly check you’ll stroke (or have automatically deducted) that are very much part of your auto-owning experience are the costs for insurance, gasoline, maintenance, fees, tolls and parking.

Generally, financial advisors advise against total vehicle costs topping 20% of take-home pay. Payments themselves, whether principle and interest or lease installments — but not insurance — should account for half that, or 10%.

Now, about insurance. Your premium will constitute a substantial portion of your car-owning costs. As with all consumer products, you should shop around. Begin by knowing your state’s minimum requirements, as well as those of the financing or leasing agency.

Review your driving record. Are there problems that can be cleaned up? What’s your current coverage? Does it require adjusting?

To cut to the chase, check out edmunds.com’s “How Much Car Insurance Do You Need.

For estimates, submit “shop car insurance quotes” to your favorite search engine. Esurance, Edmunds, Money Supermarket and NetQuote are among the top providers.

Step 2: Consult your budget

A good starting point is your budget. Experts say your total car expenses, including monthly payments, insurance, gas and maintenance, should be about 20 percent of your take-home monthly pay.

For non-math wizards, like me – Let’s say your monthly paycheck is $4,000. Then a safe estimate for car expenses is $800 per month. 

Next steps: Identify cars within your budget

Establishing an auto budget is an important first step in the car-buying process. Once you’ve landed on a number you’re comfortable with, you can move on to identifying makes and models within your price range before heading to the dealership.

Check out our guides to buying a new car or used car for tips on finding a car and financing that fits your needs.

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