Buying a car can be an exciting experience. In the heat of the moment, it’s possible to buy more car than you can truly afford. Sure, you only live once, as the car salesperson may tell you, but you pay your bills each and every month. Stretch your budget too thin and you’re going to have financial difficulties, including the possibility of not being able to make your new car payments.
New cars can be expensive. According to the vehicle and valuation specialist Kelley Blue Book, the average price for a car in in December 2016 was $35,309.
Before you do any test driving, it’s a good idea to figure out how much car loan you can afford. Just as you researched the type of car you want, you should put similar effort into determining how much you can afford and pay each month. This article will help you do just that.
Consider all of the costs of buying a car
Before you can determine how much auto loan you can afford, it’s important to consider all of the costs of owning the car that you want. Extras during purchase that you won’t usually see advertised are fees, add-ons and warranties, which can raise the price of the car by hundreds or even thousands of dollars.
Every car also comes with sales tax and registration and documentation fees, which generally add another 10% to the cost of the car.
Calculate how much car you can afford
It’s best if your car payment and cost of owning a vehicle equals no more than 20% of your monthly take-home pay. For instance, if your net pay each month is $3,500, then the car payment and costs should be no more than $700 a month.
This 20% amount should include the cost of owning and operating a vehicle, including gas, registration, maintenance and repairs. That means if you determine the cost of owning a vehicle amounts to $150 per month, you can only afford to make an auto loan payment of $550 each month.
Keep in mind the 20% is a rule of thumb. If you have a lot of other monthly expenses, such as a mortgage and personal loans and credit card payments, you may not be able to spend that much on a car each month.
Your overall monthly debt shouldn’t exceed 36% of your take-home pay. For example, if your net pay is $65,000 each year, your debt payments shouldn’t be more than $23,400 per year, or $1,950 per month. That means if you’re already spending $1,450 on other debt, you can only afford $500 monthly for a car.
Consider your down payment
How much of a down payment you make on your car loan affects your monthly loan amount. It might be possible to find a car loan that requires a low down payment amount, such as 5% to 10%, but that’s not recommended. To minimize the overall cost of your loan in terms of interest, it’s best to aim for putting down at least 20%.
Keep in mind the down payment doesn’t have to be all cash. If you plan on trading in your old car, that gives you credit toward your down payment. You may also find you’ll get more for your old car by selling it yourself. The only drawback is that you’ll need to sell the vehicle before buying your new car to get the cash, so you may be without wheels for a time.
Some dealerships and auto manufacturers offer cash rebates that are also considered as part of your down payment.
FAQ on affordable car loan
How much can I afford for a car payment?
Everyone’s financial situation will vary, but as a general rule, your car payment should be no more than 15 percent of your monthly take-home pay. If you’re leasing, it should be no more than 10 percent.
How much should I put as a down payment on a car?
Buyers who want to finance the purchase of a $15,000 used vehicle should plan to put at least $1,500 down. Lenders may require more money down on a new car than a used car to offset its quicker depreciation. Typically, an initial payment of 20 percent or more of the purchase price is wise.
Is it better to make a large down payment on a car?
Putting money down on a vehicle has plenty of advantages. The larger the down payment, the lower your monthly payment will be—and you’ll probably get a better interest rate, to boot. But if you make a larger down payment, all of those extras are offset, your loan stays above water, and you still have equity in the car.
Can I get approved for a car loan with low income?
Technically, you can use Social Security income to qualify for a car loan, but it varies by lender. If you have low credit and/or low income, some lenders may be wary of giving you an auto loan simply because they cannot garnish government income.
Is a joint auto loan the same as having a cosigner?
The short answer is no. In some ways, getting a cosigner is like a joint auto loan. This is because in both cases it can help you get a loan approval. However, a joint auto loan means that both parties own the car and are responsible for repaying the loan. Joint auto loan applicants both share responsibility for damages caused should there be a car accident. A cosigner does not share joint ownership of the car, however, has a liability to repay the loan if the main applicant fails to make payments.
Find the best auto loan lender
The amount of interest and the length of your auto loan also affect how much auto loan you can afford each month. While you can get a loan from the dealership, you’ll often get a better interest rate from a credit union or online loan lender.
Once you’ve determined how much car loan you can afford each month, you can figure out whether the car you want to buy is a realistic choice for your budget. Car loan calculators can help you determine this. They ask you to provide the vehicle price, your cash down payment amount; the trade-in value of your old car or cash price you can get for it; sales tax in your state; the interest rate you can get for the loan and length of the loan (for example, 48 or 60 months).
If you find the car you want is too expensive for your budget after doing all the calculations, consider buying a more affordable auto or a used car.
Check out SuperMoney’s Best Auto Loan Rates Reviews and Comparisons for potential auto loan lenders.
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.