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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.
Let’s get real: in today’s inflated car market, a $300 car payment might feel like a drop in the bucket But before you jump into a loan that could leave you feeling financially stretched, let’s crunch some numbers and explore your options.
The magic number: 10% of your take-home pay. Experts in finance advise preserving your car payment at less than 10% of your monthly take-home pay. This guarantees you have extra cash on hand for other necessities like housing, food, and, well, living.
But wait, there’s more! The 10% rule is just a starting point. Ideally, you should aim for a total car cost (including gas, insurance, maintenance, and the payment) that doesn’t exceed 15-20% of your take-home pay.
So, is a $300 car payment too much? It depends on your income and overall budget. Here’s how to figure it out:
1. Calculate your take-home pay. Subtract taxes and other deductions from your gross income to get your net pay. Then, divide that number by the number of paychecks you receive per month.
2. Multiply your take-home pay by 10%. This is the maximum amount you should spend on your car payment.
3. Factor in other car-related expenses. Add up the estimated costs of gas, insurance, maintenance, and any other car-related expenses you anticipate.
4. Compare your total car cost to your 15-20% budget limit. If the total car cost exceeds 15-20% of your take-home pay, a $300 car payment might be too much.
But don’t despair! Even if a $300 car payment seems out of reach, there are still ways to get behind the wheel of your dream car without breaking the bank.
Here are a few tips:
- Save up for a larger down payment. A bigger down payment means a smaller loan amount, which translates to a lower monthly payment.
- Consider a shorter loan term. Opting for a 36-month loan instead of a 60-month loan will result in higher monthly payments, but you’ll pay less interest in the long run.
- Shop around for the best interest rate. Comparing rates from multiple lenders can save you hundreds, if not thousands, of dollars over the life of the loan.
- Look for a used car. Used cars are generally more affordable than new cars, and they depreciate at a slower rate.
- Refinance your car loan. If you’ve improved your credit score since you took out your original loan, refinancing to a lower interest rate can save you money on your monthly payments.
Remember, buying a car is a big decision. Don’t rush into a loan that you can’t afford. Take your time, do your research, and choose a car payment that fits comfortably within your budget.
Bonus tip: Based on your ideal monthly payment, use NerdWallet’s car affordability calculator to determine a realistic car price. This handy tool can help you stay on track and avoid overspending.
Happy car shopping!
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
Is $300 a lot for a car payment?
What is considered a high car payment?
How much can I afford with a $300 car payment?
How much is too expensive for a 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 a down payment should you put on a car?
An appropriate down payment can significantly reduce your loan amount and monthly payments, making your car purchase more affordable. Financial experts recommend a down payment of 10-20% of the total car price. Trading in an existing vehicle can also help lower your loan amount by reducing the overall cost of the new car.
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.
Can I buy a car if I’m making a down payment?
The total loan amount you can afford isn’t necessarily the price of the car you can afford. If you’re making a down payment or trading in your old car, you’ll be able to buy a higher-priced car, or borrow less money. (Use our auto loan calculator to see how your down payment or trade-in credit affects your monthly payment and loan amount.)