How To Calculate How Much Car You Can Afford
Calculating how much car you can afford may help you save time and money in the long run. For a complete picture of your car budget, you’ll need the following:
- Total monthly take-home pay
- Monthly and annual expenses
- Credit score
- Anticipated down payment amount
- Desired loan term
- Desired vehicle type (lease, used or new)
To help you find your monthly car budget, we’ve outlined four steps below.
1. Calculate Your Monthly Car Payment
To start, calculate your monthly payment potential. Start by gathering your wage or salary information, current bank statements and records of any monthly or annual expenses.
Our team recommends beginning with your post-tax take-home pay, otherwise known as net pay, instead of your annual salary figure or gross pay. Using this reduced figure gives you a more realistic view of what you can afford for a car payment.
Remember to deduct recurring expenses, bills and other monthly budget items from your take-home pay to reach a low-risk potential monthly payment range.
MarketWatch Guidance: Factors To Consider
Don’t max out your budget. Stay prepared for unexpected financial strain by keeping your anticipated monthly car payments within reasonable ranges. Always allow room in your budget for extra expenses.
It’s also important to be realistic about how long you want to make monthly payments. Most loan companies offer terms between 24 and 84 months for used and new cars. Choosing a longer loan term can help you get lower monthly payments, but you’ll pay more overall because of the additional interest that accumulates.
Longer loan terms also increase your risk of going upside-down on your loan. This happens when borrowers end up owing more on the loan than the vehicle is worth. Since a vehicle’s value decreases over time, weigh your options carefully before choosing which vehicle to purchase.
What Kind of Car Payment Can I Afford Based on Salary?
The table below shows our team’s recommended monthly car payment limits based on your post-tax take home pay per month.
| Monthly Take-Home Pay (Post-Tax) | Monthly Car Payments Should Not Exceed… |
| $1,500 | $150 to $225 per month |
| $3,000 | $300 to $450 per month |
| $4,500 | $450 to $675 per month |
| $6,000 | $600 to $900 per month |
| $7,500 | $750 to $1,125 per month |
| $9,000 | $900 to $1,350 per month |
2. Determine Fuel and Insurance Costs
Before you purchase or lease a vehicle, consider how much your fuel expenses will be and how much car insurance will cost. Both of these costs depend heavily on your situation, such as your location, driving history and vehicle type.
The U.S. Department of Energy provides a detailed list of fuel economy figures as well as a comparison tool that allows you to check different vehicles’ annual fuel cost estimates.
For auto insurance quotes, reach out to your agent or an insurance company you’re interested in. You can easily get and compare car insurance quotes from companies to get a sense of what you’ll pay. Get started with some of our recommendations for the best car insurance companies. When calculating your monthly car payment and related expenses, try to keep your total costs to less than 20% of your monthly take-home pay.
3. Calculate Loan Amount and Term Length
Once you’ve calculated your affordable monthly payment, you can determine how much you can borrow. The amount a lender will let you borrow depends on several factors, including:
- Whether you buy a used or new car: New car loans tend to have lower annual percentage rates (APRs) than used cars.
- Your credit score: This will affect the APR on the loan and how much the bank is willing to lend you.
- Your loan term: This is how many months you’ll have to pay your auto loan off.
The image below showcases results from our 2023 consumer survey, which questioned 2,000 customers with experiences in auto loans. Nineteen percent of those respondents had a loan term of 60 months — making 60 months the most popular loan term length in the survey.
4. Set a Purchase Price
The total loan amount you calculated for your car may not be the price you pay. When shopping for a car, pay attention to details other than the sticker price. In most states, you’ll have to pay sales tax and fees whether you buy a new or used car.
Here’s a breakdown of how much you can expect to pay in fees or taxes:
- Sales tax: Up to 12.9% and varies by state
- Registration fees: Typically range from $50 to $300, although some states can be much more expensive.
- Documentation fees: Generally between $100 and $500, depending on your state
Making a down payment or trading your old car in can help you borrow less money when purchasing a vehicle.
Car Affordability Calculator
An auto loan calculator can help you determine the monthly payment and total cost of an auto loan you may qualify for. It uses factors such as your loan term, down payment and interest rate. Some calculators may also incorporate sales tax, fees and your current vehicle’s trade-in value.
PrincipalInterest
Total Principal Paid$10,000
Total Interest Paid$2,166
Total Paid$12,166
Show amortization schedule
Options To Consider When Getting 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.
Where Can I Finance a Car?
There are multiple places you can go to secure an auto loan.
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 give you a letter stating how much you’re 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 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.
Options for Getting a Vehicle
If you’re on a tight budget, explore all 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 you any value.
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 finance 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.
How Much Car Can I Afford: The Bottom Line
While there are no set limits for how much car you can afford, there are many guidelines that financial experts suggest. You can calculate the amount you can afford manually or use an affordability calculator. Before you decide on a car loan provider, explore your options to find the best deal.
Our Recommendations for Car Financing
Shopping around can help you get lower interest rates. Most banks, dealerships and third-party loan providers will give you free quotes. We recommend reaching out to Auto Approve for free quotes on auto loan rates.
Auto Approve: Best Refinance Loan
We named Auto Approve one of the top five best auto loan companies of 2024 2023. It has a reputation for being a refinance auto loan specialist, and the company’s lease buyout option makes it a viable option for those looking to purchase a vehicle. As an added bonus, Auto Approve also doesn’t charge an application fee.
Keep reading: Auto Approve Review
AutoPay: Best Overall Auto Loan
AutoPay tops our team’s ranking of the leading auto loan providers. The company has an outstanding industry reputation and offers low APRs to borrowers with good credit. With no application fees and no prepayment penalty, AutoPay is a great place to start your search for an affordable loan.
How Much Car Payment Can I Afford: FAQ
Below are some common questions people ask when searching for how much car they can afford:
According to our research, you shouldn’t spend more than 10% to 15% of your net monthly income on car payments. Your total vehicle costs, including loan payments and insurance, should total no more than 20%. You can use a car loan calculator to calculate a monthly payment within your budget.
If your take-home pay is $60,000 per year, you should pay no more than $750 per month for a car, which totals 15% of your monthly take-home pay.
According to our experts, the best auto loan companies in the U.S. are AutoPay, PenFed Credit Union, Chase, Consumers Credit Union and AutoApprove. We rated each based on its reputation, availability, loan details, rates and customer experience.
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:
- Industry standing (30% of total score): Our research team considered ratings from industry experts and each lender’s years in business when giving this score.
- Availability (20% of total score): Companies that cover a variety of circumstances are more likely to meet consumer needs.
- Loan details (15% of total score): We look at auto lenders’ financing amount limitations, available loan terms and the types of auto loans they offer.
- Rates and discounts (25% of total score): Auto loan providers with low APRs, good discount opportunities and high loan amounts scored highest in this category.
- Customer service (10% of total score): This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness, friendliness and helpfulness of each loan company’s customer service team based on our shopper analysis.
Our credentials:
- 300+ hours researched
- 25 companies reviewed
- 2,000+ consumers surveyed
*Data accurate at time of publication.
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