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  • Nicholas Hinrichsen

How Much Car Can I Afford


If you are feeling that “new car-buying” itch, you should resist the temptation of driving straight to the dealership and, instead, figure out exactly how much you should spend first.

This article will be addressing the following:

This article will walk you through everything you need to know about estimating how much car you can afford from what experts advise, to real calculations and even to some tips on budgeting to keep in mind before you leave for the dealer.


How much car can I afford?


There are many factors that go into figuring out exactly how much car you can afford such as personal buying habits, total cost of ownership, accessibility, future expectations and leave versus buying used options. All of these factors can heavily influence your affordability price range, however experts have yielded some good rules of thumb to answer the question, “how much car can I afford?” One theory is to spend less than 20% of your total monthly pretax income on automotive expenses such as car insurance, warranties, car payments, gas and maintenance. Other experts recommend staying between the 10% to 15% range of your total annual income on your net vehicle purchase. Some claim that a vehicle that costs about half of your total annual take-home pay will be affordable.


As you can tell, there is no perfect rule for how much you should spend on your next car purchase, however a good rule of thumb is to make sure that your new car monthly payment is no more than 15% of your monthly take home pay. The reason we recommend a seemingly frugal cap on your suggested monthly car payment is because we are also taking into account the cost of auto insurance of fuel expenses. These two peripheral expenses should total to no more than 7% of your monthly take home pay, which would cause your monthly automotive expenses to equal around 20% when including the monthly payment, insurance and fuel costs.


Total Cost of Ownership


Speaking of extra costs besides your loan payments, you should consider the TCO, total cost of ownership, of your vehicle before placing that downpayment. Total cost of ownership refers to registration fees, fuel costs, insurance premiums, ongoing repairs and maintenance. We already suggested setting aside 7% of your total monthly income towards insurance premium and fuel expenses, but how exactly can you calculate these two factors of TCO? To answer your question, you can refer to the Environmental Protection Agency’s website for figures on fuel economy and annual fuel cost estimates for new and used vehicles. When it comes to insurance, you can request an insurance quote by contacting your agent or an insurance company. Click here for a list of vehicle sales tax percentages by state. Click here for the National State Legislatures’ interactive map of vehicle registration fees by state. One more factor that you should account for is parking expenses; if you live in a high traffic area with high parking rates, you may want to look into rideshare options or public transportation to spend less money.


How can I specifically calculate this?


Your automotive budget is that 20% allocated for your total cost of owning a specific vehicle that we discussed above; follow these steps to calculate it:

  1. Make a list of monthly expenses

  2. Ex. groceries, savings, rent or mortgage, bills, child expenses, and spending on entertainment

  3. Make a list of TCO expenses and their values

  4. Ex. registration fees, fuel costs, insurance premiums, ongoing repairs and maintenance

  5. Refer to the heading “How much car can I afford?” for details on how to calculate each expense

  6. Subtract both expenses from your monthly take home pay (post tax)

This ending value represents your total automotive expense. If this number is below 20% of your monthly take home pay, you have the green light from us to put down your credit card. If your value is above the 20% monthly budget, you should look into leasing or buying a used car.


This ending value represents your total automotive expense. If this number is below 20% of your monthly take home pay, you have the green light from us to put down your credit card. Edmunds also provides an car affordability calculator on their website. This calculator allows entries for your zip code, target monthly payment, total loan term (in months), market finance interest rate, value of trade-in, amount owed and cash down payment. The calculator will show you a suggested total amount for a down payment and average sticker price.


What are some tips to keep in mind when looking for a car?


When looking for a new car, keep in mind the following tips:

  • Avoid overstretching your payments

  • A longer loan term leads to a higher loan amount as interest rates rise because you need more amount of time to meet your lender's insurance requirements

  • Refrain from spending the maximum amount you can afford

  • Leaving the car lot with a more affordable car and a better grip on personal finances will leave you feeling better than leaving with a car you struggle to afford

  • Look at the big picture

  • Take into account future expectations

  • For example, spend less on a vehicle if you plan on buying a new home or sending a child to college

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