How much car can I afford? (2022 guide)

How much car can I afford? (2022 guide)

Determine how much car you can afford

A vehicle is often one of the most expensive purchases people make, so it’s critical to determine whether you can make the monthly payments on an auto loan before you commit to a specific car.

Get an initial figure by using a car loan calculator

The interest rate you receive on an auto loan plays a big part in calculating your monthly payment amount. A higher credit score will score you a lower interest rate, which will ultimately lower your monthly payment and your total overall loan cost.

You can use a car loan calculator to determine how different interest rates will affect your monthly payment. Here’s how:

  • Pull a copy of your credit report and find out your credit score.
  • Get prequalified with a few lenders to determine the average interest rate you could be offered.
  • Plug in your interest rate, desired repayment term length and car price to the calculator.

Bankrate insight Use a car loan calculator to get an idea of what your monthly payments will be before you complete a full auto loan application.

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Step 3: Plug and chug

Take your monthly payment estimate from step 2, and plug it into this handy dandy calculator. It’ll help you determine how much car you can afford.

1. Income 

Calculate your take-home income. This is how much you earn after taxes. In general, experts recommend spending 10%–15% of your income on transportation, including car payment, insurance, and fuel. For example, if your take-home pay is $4,000 per month, then you should spend $400 to $600 on transportation. 

To be sure, that range is simply for guidance. Depending on your income and expenses, you may have to budget less. For example, if you live in an area with high housing costs, then you’ll have less to spend on a car. 

Deciding Your Budget 

Using the above information, here’s an example of how to create a budget for buying a car. For this example, we rolled the cost of tax, title, and fees into the purchase price of the car. 

If your take-home pay is $4,000 per month and you follow the 10%–15% guideline, then you’ll spend as much as $600 a month on transportation. After subtracting the cost of your insurance and setting aside money for maintenance, that leaves you with $464 per month to use as a car payment. 

Assuming you have good credit and a small amount of existing debt, you could qualify for a loan with a 60-month term and an interest rate of 5%. With those terms, the most you could afford is $22,000; that would give you a monthly payment of $451 per month. 

 Types of Expense  Cost  Payments  $451  Maintenance Fees  $12  Car Insurance Premiums  $124

Consider your purchasing options

If you’re on a tight budget, explore all of your options before purchasing a car. Several choices are available, including leasing or buying a used or new car.

Leasing

A car lease allows you to essentially rent a car from a dealership for a certain length of time and mileage. It can be a good option since the monthly payments are lower than those for buying the car outright. However, keep in mind that you’ll have a mileage limit and the money you pay toward your car won’t bring any value to you.

Buying a used car

Purchasing a used car gives you more freedom than a car lease. Used cars tend to be priced significantly lower than new cars, making monthly payments more affordable. Additionally, car expenses such as insurance tend to be lower for used vehicles.

Buying a new car

If you want to purchase a new vehicle, do your research so you know which make and model you want. Knowing a car’s fair market value will help you negotiate the best deal possible at a dealership.

5 tips for getting the best deal possible on a car

I’ve been buying cars for clients (and myself) for years. On average, I negotiate and save $3,100 on each car I buy. Dealerships have outright expressed their disdain for me, and their nasty texts and emails help me to sleep at night like warm tea. 

You can read all of my secrets, as well as the best A-to-Z process for buying your first car, in my feature Car Buying Guide: How To Buy A Car And Save Big On Your Ride

In the meantime, here are some of my favorite and most effective tips over the years. 

Shop around for car insurance

My first two car insurance quotes for my 2001 Mazda Miata were $200 and $1,000 for six months. Same car, same goober driving it – 400% price difference. 

Every insurance provider sees each driver and car pairing differently, so it absolutely pays to shop around for at least five quotes. Check out The Best Car Insurance Companies For Young Adults

Buy used – seriously 

A used car that’s passed a pre-purchase inspection is nearly as good as a brand new car. 

In some cases, it’s even better. Generally speaking, a Toyota with 50,000 miles on it will outlast a VW, Fiat, or an Alfa Romeo with 0 miles on it. It all comes down to initial build quality, which some manufacturers emphasize more than others. 

Used cars are also significantly cheaper (when there’s not a chip shortage). As a general rule of thumb, cars lose at least 15% of their value each year – so if you’re considering a Mazda3, look back just a few model years for a steep discount. 

Don’t pay a penny for dealer extras

Before you sign, dealerships will try to include “recommended extras” onto the invoice price. These typically include a $1,000 ceramic coat, $1,000 for a GPS anti-theft device, and $100 for nitrogen in the tires. 

You can apply a ceramic coat yourself for $50, put an Apple AirTag under the seat for $29, and get free Nitrogen at Costco (oxygen is also fine). 

Oh, and ask to waive the “documentation fee.” It’s not a fake fee, but dealers charge too much and many will reduce or remove it upon request. 

In fact, don’t go to a dealership at all 

For decades, car dealerships have relied upon seedy manipulation tactics like hidden costs, undervaluing your trade-in, and outright lies just to get you in the door. 

And now, with lower inventory and increasing pressure from Carmax and Carvana, they’re getting bolder and more desperate. 

You can still negotiate a good deal with dealerships, but you’ll need to enter the lion’s den ready to fight. For everyone else, Carmax is a much better choice.  

Read more: Ex-Car Salesman Tells All: How To Beat The Auto Dealerships At Their Own Game

Reliability is the best luxury

Finally, I’d urge you to make reliability one of your top considerations when buying a car. In addition to browsing the Consumer Reports reliability surveys, run any car that you’re considering through The Edmunds Inc. True Cost to Own® tool

Tinkering around with TCO® will reveal that while a fancy 4-Series Bimmer may cost less than a Mazda3 to buy, it costs over $20,000 more to own and maintain over 5 years. 

A customized budget

Following conventional wisdom will work just fine for some car buyers. But in some cases, it’s helpful to create a more-customized monthly budget.

Doing so will give you a detailed picture of your finances, and you can use that picture to get a better idea of how much car you can afford. This can be especially useful if your monthly living expenses are unusually high or unusually low compared to most people.

To go this route, you’ll need to calculate the following monthly income and expenditures.

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Net income

This is your take-home pay: gross income minus federal, state and local income taxes.

Current nonauto expenses

These include your rent payment or mortgage and expenses related to things like credit card debt, groceries, utilities, entertainment and clothing.

Many people pay their bills using a debit or credit card. If you’re one of them, you can use your bank or credit card statement to get a snapshot of your monthly expenses.

Projected nonauto expenses

Some people buy a car in the context of a major life change, like getting married, starting a family, getting divorced or purchasing a new home.

If you’re buying a car ahead of one of these milestone events, make sure your expense calculations reflect your new (or planned) situation. For example, if you’re expecting a child, you’ll need to make some estimates regarding the monthly costs that will come with raising your young one.

Discretionary funds

The final step of creating your budget involves subtracting all current and projected expenses from your net income. This will tell you how much free cash, or discretionary funds, you’ll have available each month after all your bills have been paid.

If you like having a certain amount of extra cash on hand for things like vacations or retirement savings, keep this in mind when deciding how much to spend on your new car. It’s also essential to set money aside for unforeseen expenses.

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 5 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

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.

Our methodology

Because consumers rely on us to provide objective and accurate information, we created a comprehensive rating system to formulate our rankings of the best auto loan companies. We collected data on dozens of loan providers to grade the companies on a wide range of ranking factors. The end result was an overall rating for each provider, with the companies that scored the most points topping the list.

Here are the factors our ratings take into account:

  • Reputation (25% of total score): Our research team considered ratings from industry experts and each lender’s years in business when giving this score.
  • Rates (25% of total score): Auto loan providers with low APRs and high loan amounts scored highest in this category.
  • Availability (25% of total score): Companies that cover a variety of circumstances are more likely to meet consumer needs.
  • Customer Experience (25% of total score): This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness, friendliness and helpfulness of each warranty company’s customer service team based on our shopper analysis.

*Data accurate at time of publication.

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