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Financial experts advise spending no more than 10% of your monthly take-home pay on your car payment and no more than 15% of your total car costs, which include gas, insurance, and maintenance in addition to the payment.
If that leaves you feeling you can afford only a beat-up jalopy, don’t despair. You can gain flexibility with your car payment using a balanced budget approach. Here’s how it works.
Take some time to figure out the highest car payment that fits within your budget before heading to the dealership or beginning your online car search.
Balancing Affordability and Your Dream Ride
Buying a car is a significant investment, and the monthly payment is a major factor in your decision. While $400 might seem like a hefty sum, whether it’s too much for you depends on your individual circumstances and financial goals. Let’s dive into the factors that influence this decision and help you determine the optimal car payment for your situation.
The 10% Rule: A Guiding Principle
Financial experts often recommend keeping your car payment under 10% of your take-home pay. This rule of thumb ensures you have enough money left over for other essential expenses like housing, food, and savings For example, if your monthly take-home pay is $4,000, aiming for a car payment around $400 would align with this guideline
Beyond the 10% Rule: Tailoring Your Budget
Although the 2010 rule offers a useful starting point, it is not a strict rule. However, Your ideal car payment may vary based on your unique financial circumstances. Here are some factors to consider:
- Total Debt: If you have significant debt from student loans, credit cards, or other obligations, you might want to keep your car payment lower to manage your overall debt burden effectively.
- Savings Goals: If you’re saving for a down payment on a house, retirement, or other significant financial goals, you might prioritize saving and opt for a lower car payment.
- Lifestyle Expenses: Consider your essential and discretionary expenses. If you have high costs for housing, childcare, or other needs, you might need to adjust your car payment accordingly.
- Vehicle Type and Condition: The cost of the car itself plays a significant role. A newer or luxury car will naturally have a higher price tag and, consequently, a higher monthly payment.
The Importance of Affordability
Remember, a car is a depreciating asset. Its value decreases over time, unlike investments that typically appreciate. Therefore, it’s crucial to choose a car payment you can comfortably afford without straining your budget or sacrificing other financial goals.
Beyond the Monthly Payment: The Total Cost of Ownership
When evaluating car affordability, don’t solely focus on the monthly payment. Consider the total cost of ownership, including:
- Fuel costs: Gas prices fluctuate, so factor in the estimated fuel consumption of the car you’re considering.
- Insurance: The cost of car insurance varies depending on your driving history, location, and the type of car you choose.
- Maintenance and repairs: Regular maintenance and unexpected repairs are inevitable. Budget for these expenses to avoid financial surprises.
Finding the Sweet Spot: Balancing Affordability and Your Needs
In the end, you should choose a car payment that strikes a balance between affordability and your needs and preferences. It might be a good choice for you if you can pay $400 a month comfortably, fulfill your other financial commitments, and live the lifestyle you want. However, it’s advisable to think again and look into more affordable options if a $400 payment puts a strain on your finances or prevents you from achieving other financial objectives.
Recall that a car should be an asset to your life, not a source of financial strain.
How do lenders determine a car payment?
Several factors contribute to the amount of your car payment.
- The loan amount.
- The length of the loan.
- The interest rate plus any lender fees are included in the annual percentage rate, or APR.
Sticking to a maximum car payment amount can be beneficial when haggling at a dealership. However, exercise caution if a dealer pushes you to take out a longer loan term in order to lower your monthly car payment. If you take out a longer loan, you may end up paying a lot more interest overall. For used cars, NerdWallet normally advises loans of no more than 36 months, and for new cars, no more than 60 months, though this may be more challenging in the current market.
You run the risk of wasting a lot of money if you just consider the monthly car payment and neglect the overall cost of financing. For example, look at how two different loans can result in the same car payment.
|
Monthly payment |
Loan amount |
APR |
Term |
Total interest |
|---|---|---|---|---|
|
$530 |
$22,318 |
6.57% |
48 months |
$3,122 |
|
$530 |
$28,804 |
9.75% |
72 months |
$9,356 |
The interest rate on your auto loan also affects your car payment. Your credit score is one of the factors that determines the interest rate you pay on a loan; lower credit scores typically translate into higher rates. However, rates differ between lenders, so it’s a good idea to compare rates to get the best deal on your auto loan. It’s crucial if you require an auto loan for bad credit because these loans typically have the highest interest rates.
You can use NerdWallet’s auto loan calculator to compare various rates and terms.
Set your car payment budget
NerdWallet recommends using the 50/30/20 rule when setting your overall budget. To do this, divide your take-home pay into three general spending categories:
- 50% for necessities like housing, food, and transportation 20%E2%80%94%, which in this instance is your monthly car payment and associated auto expenses
- Thirty percent for wants like travel, entertainment, and other non-essential items
- 20% is allocated for savings, credit card repayment, and long-term financial goals.
A monthly auto loan payment typically falls into the “needs” category. If you’re purchasing a car, it’s probably necessary for you to get to work or drop the kids off at school.
However, the balanced budget approach can provide flexibility. If you share housing expenses with a roommate, for instance, you may have more money set aside in the “needs” category for a car payment. Alternatively, you could classify a portion of your monthly payment as “wants” spending if you’d like a more expensive car.
The key is keeping the budget balanced overall. If you intend to make certain financial cuts, you could decide to allocate a larger portion of your take-home pay—more than 10% of it—to a car payment.
You can go back to what you can afford to spend on a car once you know how much your car payment should be. NerdWallet’s car affordability calculator lets you start with a monthly car payment to estimate a realistic car price.
How Much Car Can You Really Afford? (Car Loan Basics)
FAQ
How much is a $400 a month car payment?
|
Finance Term
|
Monthly Payment
|
Car Price
|
|
3 Years
|
$400
|
$12874
|
|
4 Years
|
$400
|
$16569
|
|
5 Years
|
$400
|
$20000
|
|
6 Years
|
$400
|
$23187
|
Can I afford a 400 car payment?
What is too high of a monthly car payment?
Is $500 a month a high car payment?
Can you afford a $300 car payment?
NerdWallet recommends spending no more than 10% of your take-home pay on your monthly auto loan payment. So if your after-tax pay each month is $3,000, you could afford a $300 car payment. Check if you can really afford the payment by depositing that amount into a savings account for a few months.
How much is $400 per month?
But the same $400 per month spread out over six years (72 months) is $28,800, while it’s $33,600 over seven years (84 months). If you solely focus on payment, these might all seem like the same $400 per month, but if you focus on the sum of all those payments, you’ll see significant differences between these figures.
How much car can you afford?
To determine how much car you can afford, financial experts recommend keeping your total monthly car payment at 10% or less of your gross monthly income, spending no more than 15% to 20% of your take-home pay on car expenses, and ensuring that total vehicle costs, including loan payments and insurance, don’t exceed 20% of your monthly income.
What if my car payment is too expensive?
Consider the following options to take if your vehicle payment is too expensive. Refinance your loan: Refinancing your vehicle loan is taking out a new loan to replace your current one, but with rates and terms that better fit your budget. It’s smart to calculate potential savings ahead of time to find one that best suits your needs.