How Much Car Can I Afford? How To Calculate

You’ve held on to that old car for just about as long as you could. You named him Barnaby, and you took many memorable trips together. Yet sadly, the mechanic gave you the dreadful news — the cost to keep Barnaby rolling down the road will way exceed the Kelley Blue Book value. The garage can’t guarantee how long Barnaby will last once you’ve shelled out thousands for repairs.

Read More: 6 Genius Things All Wealthy People Do With Their Money

Once you’ve come to grips that it’s time to move on from Barnaby, your immediate thought will undoubtedly be this: How much car can I afford?

How Much of a Car Can You Afford Based on Your Salary?

Many financial experts would advise you to not spend more than 10% to 15% of your net monthly income on car payments. For total vehicle costs, which include loan payments and auto insurance, you should try to aim for no more than 20% altogether.

4 Ways To Calculate How Much Car You Can Afford

Unfortunately, finding the answer isn’t simple as the car affordability calculator will vary depending on your personal finances, annual income and monthly budget. The good news is that thanks to a variety of online calculators, it’s easy to figure out your monthly payment — once you gather some information. Here’s what you need to know to determine just how much car you can afford and what financial experts recommend.

1. Start with the 20/4/10 Rule

2. Know your credit score

3. Do your research

4. Determine whether leasing is right for you

1. Start With the 20/4/10 Rule

So, what is the 20/4/10 rule? It’s a general guideline that helps you to determine how much you should spend on a car. It might not fit every budget or your particular circumstances, but it’s a good starting point as you begin to look at cars.

According to Capital One, the 20/4/10 rule can help you determine how much car you can afford if you meet these requirements:

• 20% down payment: You are able to put down at least 20% on the car.

• 4 years to pay off debt: You can pay off the car in 48 months- four years — or less.

• 10% of your monthly income: Your total monthly car costs, which include the car payment, maintenance, gas, insurance, etc., won’t exceed 10% of your monthly income.

Remember, this is just a starting point to help inform your next steps.

2. Know Your Credit Score

Your credit score impacts your ability to borrow money. The higher your credit score, the lower the interest rate you’ll receive on a car loan, and the difference in your monthly payments can be sizable if you’re paying a higher interest rate. That’s especially true when you consider that the cost of a new automobile reached an average of more than $45,000 in 2022, J.D. Power reported.

As an example, credit bureau Experian said that in the second quarter of 2022, borrowers with super prime credit scores — 720 or above — paid an interest rate of 2.96% for new vehicles and 3.68% when buying used. At the other end of the spectrum were the deep subprime borrowers — 579 or below — who were charged 12.84% on new vehicles and 20.43% on used ones.

Example

Say you fall in the middle of the scale, with a credit score of 650. Nonprime borrowers — 620-659 scores — paid 6.57% interest for new cars, with a 10.33% average for new ones. If you borrowed $20,000 to finance your car purchase, your monthly payment for four years would come in at about $475, according to Experian’s auto finance calculator.

If your credit score allows you to borrow at the best rate, you’d pay about $442 per month. At the highest rate? About $535.

And look at that difference of $93 per month over the long haul. That’s pure interest, meaning you’d pay about $4,500 more in interest over the life of that four-year loan than if you qualified for the lowest interest rate.

Finding Your Credit Score

The easiest way to find your credit score is by looking at your credit card statement. Most credit cards offer credit score monitoring as a free service.

You can also get your credit score from one or more of the credit bureaus — Experian, TransUnion and Equifax — but they often charge fees if you check too often.

3. Do Your Research

Armed with your credit score, it’s time to figure out what kind of car you realistically can afford. Go back to the 20/4/10 rule.

If you bring home $4,200 a month after taxes, your car expenses should be no more than $420 per month. Remember, that includes gas, tolls, maintenance and insurance. Look back at what you spent in those categories over the past few months and make an estimate; your maintenance costs will be less than you’ve paid to keep that old car running. If $150 is the figure you come up with, then you can afford a payment of $270.

Car Loan Calculator

Turn to a reverse auto loan calculator, like one offered by Autotrader, now that you’re armed with your research. Enter the amount of your desired car payment, the interest rate you anticipate paying — a quick Google search will show you average rates for your credit score — and your local sales tax rate.

Find Your Car

If, after using the calculators, you find that a $25,000 price point should be your target, continue your research and consider your total car expenses. Here are some key questions to ask yourself:

• Do you have a preferred manufacturer?

• How much extra will you pay for certain add-ons?

• What will your car loan payment each month be?

• What will the car insurance for this model be per month?

• What car can you afford based on your salary?

• Are shorter or longer loan terms better for you?

• What annual percentage rate, or APR will you have to pay?

While you’re on the dealer websites, look for the current specials. You might find deals on pricing, as well as financing, that could help you afford a higher price point.

4. Determine Whether Leasing Is Right for You

If you find car affordability might be a stretch, leasing is an option. Your down payment and monthly payment will be less — a huge advantage — but remember that leasing has strict mileage limits, and you’ll be turning the car back in after a set number of months, which means starting the process again.

Compare leasing vs. buying a 2023 Kia Soul, for example.

Kia advertises an average new car model for Soul LX with payments of $229 a month for 36 months, with $2,870 due at signing. While the monthly payment sounds terrific, you’re limited to driving 10,000 miles a year before excess mileage rates of 20 cents per mile kick in. This could appeal to those who work from home, but anyone with a commute to work will gobble up the mileage allotment quickly — making this lease not such a good deal.

Final Take To GO

Before heading to the dealership, it’s wise to do your homework to determine car affordability and what you’re comfortable spending each month. You don’t want to find yourself cash-poor because of your car.

Once you have figured out your car affordability calculations and punched in the numbers, you’ll see the amount of car loan you can afford. Add in the down payment you can make, and you’ll have a ballpark idea of the sticker price of the car you can afford.

FAQ

Here are some answers to frequently asked questions about how much car you can afford.

• How much should I spend on a car if I make $100,000?

  • If you make $100,000 a year it is recommended that you don't spend more than around $800 per month on car payments.

Caitlyn Moorhead contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: How Much Car Can I Afford? How To Calculate