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How Much Car Can I Afford?

A couple smiles in front of their new car after determining how much car they could afford

One of the most important things that car buyers ask themselves is, “How much car can I afford?”

When you consider your overall personal financial picture, the amount of your down payment, your interest rate, and other loan terms, it can paint a much clearer picture of just how much vehicle you can expect to buy.

Read on to learn how to answer the question: “How much car can I afford?”

Loan Terms & Interest

Various loan terms can drastically influence the amount of your monthly payment and reduce or increase your vehicle affordability.

Interest Rate

The interest rate that you qualify for and receive will have a big impact on your payments and loan affordability. If your credit is poor, you will not have access to prime interest rates and will end up paying more out of pocket for that dream vehicle. In some cases, it may be worth it to wait until your credit score is better before you attempt to apply for a new auto loan. 

The better the interest rate you can obtain, the more car you can afford. Shopping around for the best interest rates can also get you access to a much nicer vehicle than jumping on the first deal you can find. Keep in mind that credit unions typically have better rates and more flexible loan options than large banks.

Down Payment

Of course, the amount of the down payment you put toward your vehicle will also make a considerable difference in how much your monthly payment will be and how much car you can afford. 

A sizable down payment can mean the difference between stretching beyond your means and being able to comfortably pay your bills each month. Remember that a trade-in can count toward a down payment as well!

Length of Loan

The length of your loan will also affect the overall interest paid on the loan as well as your monthly payment. 

The longer the repayment period of your loan, the lower your monthly payment will be, but the more you will pay out in interest over time. A loan with longer repayment terms can help you afford a much more expensive vehicle, although you will be paying for it much longer.

Household Budget

In general, it is recommended that transportation costs such as a car payment make up no more than 10% to 20% of your household income and budget. You will also need to factor in other aspects of transportation costs such as gas, car insurance, maintenance, and toll road fees.

For example, if your monthly household income is $3,000, you will want to make sure that all of your car-related expenses do not exceed $600. So if you know that you will be spending $100 a month on gas, $50 a month on toll fees, and $50 a month on insurance, then you can plan for a car payment of no more than $400.

Another common budgeting rule is not spending more than 50% of your annual income on a vehicle. And some financial experts recommend a number closer to 10% of your annual income. These guidelines should be considered within the scope of your financial situation and lifestyle.

While it can be tempting to spend above your means, remember that you will need to be able to keep up with your monthly payment for several years. Be sure to protect yourself against unforeseen circumstances and keep your payments as low as possible by selecting a vehicle that you can afford. 

Calculating Your Payment or MSRP

Once you have established some parameters, it’s time to make the final decision on the down payment and loan amount.

To explore how much of a car payment you can afford as well as your monthly payment options, check out our calculator. You can play around with different numbers to see your estimated monthly payment for a particular loan amount. This calculator will also let you know the total amount of interest that will be paid over the lifetime of the loan.

Lease vs. Buy

If you are someone who likes to frequently upgrade to the latest and greatest vehicle, you may benefit more from obtaining a vehicle via an auto lease instead of financing a vehicle outright. Choosing a lease can help you afford a new car if your budget would only allow you to finance an older used car.

Because automotive leases have different terms and potentially better interest rates, you may be able to afford more car with a lease than with a purchase. Lease payments are typically lower per month than a typical auto loan.

How Much Car Can I Afford? Let Us Help You Decide!

There is a lot that goes into answering the question, “How much car can I afford?” But AFFCU is here to help you crunch the numbers. We also offer great rates and loan terms.

Your financial goals are our priority, and that applies to auto buying and car loans as well. Buying and financing a car does not have to threaten your financial security. Learn more about these myths and let AFFCU help you get on the right path today. 

Don’t Let These Common Auto Buying Myths Wreck Your Financial Goals