How Much Car Can You Afford?
One of the most important questions before buying a vehicle is not "What is the largest loan I can get?" but "What vehicle payment fits comfortably within my budget?"
A lender may approve a particular loan amount, but an approved amount does not necessarily represent an appropriate personal budget.
Start With Your Monthly Budget
Begin by reviewing your regular income and expenses.
Consider housing, utilities, food, insurance, debt payments, savings and other recurring costs before deciding how much room is available for a vehicle.
Remember That a Car Costs More Than the Loan Payment
Your monthly vehicle budget should account for more than principal and interest.
Consider:
- Auto insurance
- Fuel or charging costs
- Maintenance
- Repairs
- Registration
- Parking
- Taxes and fees
How the Vehicle Price Affects the Payment
A more expensive vehicle generally requires a larger amount financed unless you compensate with a larger down payment or other equity.
Even a relatively small difference in purchase price can affect the monthly payment when combined with taxes, fees, APR and loan term.
Down Payment Matters
A down payment reduces the amount you need to finance.
For example, if the purchase price is $32,000 and you make a $7,000 down payment, the starting amount before taxes, fees and other adjustments is substantially lower than financing the entire purchase price.
Loan Term Matters
A longer loan term can reduce the monthly payment because the balance is spread over more months.
However, a longer term can also increase the total interest paid.
Interest Rate Matters
Two buyers purchasing the same vehicle can have different monthly payments if their financing terms differ.
Compare several APR scenarios when estimating your budget.
Use a Car Loan Calculator
Our car loan calculator lets you change the vehicle price, down payment, APR and loan term to see how different combinations affect the estimated monthly payment.
Do Not Forget Your Trade-In
If you are replacing an existing vehicle, calculate your trade-in equity before deciding how much you can afford.
Positive equity may reduce the amount you need to finance, while negative equity can increase it.
Final Thoughts
The right vehicle budget depends on your complete financial situation. Use the loan payment as one part of your budget rather than the only factor.
Before purchasing, calculate the expected payment and estimate the other ongoing costs of ownership.