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When it’s time to buy a car, you’ll probably want to know: “How much car can I afford?”
Financial experts respond to this query with a straightforward rule of thumb: car buyers should not spend more than 2010% of their take-home pay on a car loan payment and should not spend more than 2020% of their total car expenses, which also include things like gas, insurance, repairs, and maintenance.
You can determine how much you can afford to borrow for your auto loan once you know how much you can afford for a monthly car payment. This allows you to determine a reasonable goal price and, at last, provide a response to the query, “What car can I afford?”
Here’s the deal:
- Rule of thumb: Financial experts recommend keeping your total monthly car payment at 10% or less of your gross monthly income. This means that if you’re making $40,000 a year, your monthly car payment shouldn’t exceed $333.33.
- But wait, there’s more: Total car ownership costs include not just the monthly payment, but also insurance, gas, maintenance, and repairs. Experts suggest keeping total car expenses under 20% of your take-home pay. This means that with a $40,000 salary, your total car expenses shouldn’t exceed $666.67 per month.
Now, let’s get down to the nitty-gritty:
1. Calculate your monthly take-home pay: Subtract taxes and other deductions from your gross monthly income. This will give you a realistic picture of how much you have to work with each month.
2. Estimate your total car expenses: Use online tools like fueleconomy. gov to estimate fuel costs based on your desired car’s fuel efficiency. Research average insurance premiums for your location and car model. Consider the cost of possible upkeep and repairs, particularly if you’re thinking about buying an older vehicle.
3. Use a car affordability calculator: These handy tools take into account your income, down payment, interest rate, and loan term to give you a realistic estimate of how much car you can afford. You can find them on websites like Money Under 30
4. Consider your lifestyle: Are you a weekend warrior who loves road trips? Or do you mostly commute to work and run errands? Your lifestyle will influence the type of car you need and, consequently, the cost.
5. Don’t forget about the down payment: A higher down payment results in lower monthly payments and a shorter loan-life interest rate. Aim for a minimum of 10% of the car’s value, but even better is 10% of 2020.
6. Examine your options for financing and compare rates offered by banks, credit unions, and online lenders. A lower interest rate can significantly reduce your monthly payments.
7. Keep in mind that owning a car comes with expenses in addition to the vehicle itself, such as insurance, gas, upkeep, and repairs. Before making the commitment, be sure you can afford these recurring costs as they can mount up quickly.
Here’s a quick breakdown of how much car you can afford based on your $40,000 salary:
- Monthly car payment: $333.33 or less
- Total car expenses: $666.67 or less
- Car affordability calculator: Use a calculator to get a personalized estimate based on your specific financial situation.
Always remember that when it comes to purchasing a car, it’s better to err on the side of caution. Avoid going over your budget in an attempt to purchase your ideal vehicle. Select a vehicle that meets both your requirements and your financial constraints, and you’ll soon be driving toward financial independence!
Calculate the car loan amount you can afford
You can estimate how much you can borrow once you’ve determined your affordable monthly car payment amount. This will depend on several other factors, including:
- Your credit score, which influences your loan’s annual percentage rate, or APR,
- The length of time you have to pay back the loan, or the loan term
- Whether you buy new or used. New car loans tend to have lower APRs.
The car affordability calculator calculates the total loan amount you can afford by working backwards from a monthly payment, an estimated annual percentage rate, and the length of the loan.
How to use the car affordability calculator
The majority of car payment calculators begin with the desired total loan amount and additional inputs to determine the monthly payment. The car affordability calculator on NerdWallet begins with the monthly payment you select and displays the maximum loan amount you can afford, as well as how the loan term and APR affect the overall loan amount.
Enter the desired loan term and the monthly car payment you can afford into NerdWallet’s car affordability calculator. Then select “new” or “used” and your credit tier. (You can check your credit score for free, if you don’t already know it. ).
Using information from Experian Information Solutions, NerdWallet calculates an APR based on the typical APR for new or used auto loans in that credit category. You can try different loan terms and adjust the inputs to further customize your loan amount.
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How Much Car Can You Really Afford? (By Salary)
FAQ
How much car can I afford if I make 40 000 a year?
How much should I pay for a car if I make 45k a year?
How much should I spend on a car if I make 42k a year?
How much should my car cost if I make 50k a year?
How much money should you spend on a car?
As a rule of thumb, never spend more than 35% of your gross annual income on a car. The following calculator allows you to see enter variables, including down payment, interest rate, and loan term to compare a monthly payment to what’s affordable. Note that this calculator does not work for leasing.
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.
How much money can a new car pay a month?
Paying an estimated 20% in income taxes would translate to a monthly income of about $3,148 for a buyer we’ll call John. If we follow our 15% rule, John could handle a monthly car payment of up to $472. In September 2019, the average amount financed for a new vehicle was $32,928, according to Edmunds data.
How much does a car cost a year?
According to American Automobile Association, the average annual cost of owning a car is $8,849. This value includes the cost of gasoline, insurance, maintenance, registration, depreciation costs, and car loan interest. The car affordability calculator allows you to calculate how much you can spend on a new car.