Car Affordability Calculator: How Much Car Can I Afford?

  Desired monthly payment

The average car payment in the U.S. is $737 for new cars and $520 for used. That’s a lot, especially if you’re already on a tight monthly budget. Think about whether the car note is worth it before getting your heart set on a particular vehicle.

Also, remember that your car will likely depreciate. Going into a bunch of debt for a depreciating asset isn’t the wisest investment.

  Down payment

How much should you put down on a car? The general rule is at least 20% on a new car and 10% on used. Plus, putting down even more can help get you a lower rate. It’ll also let you get a smaller car loan, leading to less overall interest.

If you have bad credit, a bigger down payment can make it easier to get approved for a car loan. The more you put down, the more protection you’ll have against an upside-down car loan, too. An upside-down car loan is when you owe more money than what your car is worth.

At the same time, you don’t want your down payment to be so big that you stretch yourself too thin in other areas.

  Amount owed on trade

This won’t apply if you don’t owe money on the car you’re trading in (or if you aren’t trading in at all).

You’ll need to pay off your current car loan before a trade-in. The dealer or lender may roll what you owe into your new car loan, so you won’t have to pay your old loan out of pocket. However, this will drive up your monthly car payment since you’ll need a bigger loan.

If you’re upside down, you’ll have to pay off your old car loan plus the difference between the car’s worth and what you owe (called negative equity). In some cases, the dealer might roll your negative equity into your new car loan — for example, if you have excellent credit.

  Credit score

Does “offer only applies to well-qualified buyers” ring a bell? That means that the lowest interest rates and best financing deals typically go to people with excellent credit or better (740 or higher).

Rates aside, the credit score needed to buy a car will depend on the lender. You might have to stick to bad credit car loans if your score is below 660. And while it’s also possible to buy a car with no credit history, the lender could require a cosigner.

  Interest rate

Interest is what you pay to the lender for borrowing money, not including any fees. An annual percentage rate (APR) represents your interest rate and fees. Most car loans are simple interest loans, which means the lender only charges interest on what you currently owe.

 Loan term

Your loan term represents how long it’ll take you to pay off your car, assuming you make minimum monthly payments. Longer loan terms usually mean lower car payments — you’ll have more time to spread your balance across. However, you’ll pay more overall loan interest.

According to the latest data from Experian, the average auto loan for a new car is $41,086. For used cars, it’s $26,091. Average doesn’t mean affordable, though. Here are a few ways to calculate what fits in your budget:

1. Use the 20/4/10 rule as a guideline

An easy way to get a general idea of how much car you can afford is by using the 20/4/10 car buying rule.

2. Calculate your total automotive costs

Affordability is more than just the price of the car. A LendingTree study found that, on average, drivers pay $1,160 a year on vehicle maintenance. There are also other additional expenses to consider, such as:

• Sales tax and annual personal property tax (if your state has them)
• Registration fees
• Monthly car payments
• Car insurance
• Gas
• Parking and/or tolls

3. Shop around for a car loan

Just like car insurance companies, every lender has different ways of calculating what rates and fees it charges. Auto loans aren’t just lender-specific, either. Where you finance your car can also determine what benefits you get.

Banks and credit unions often have the lowest rates. However, credit unions require membership before you can borrow, and bank loans tend to have higher credit score requirements.

Manufacturer financing (also known as captive financing) is when you get your car loan straight from the car maker — Toyota Motor Credit is an example. Manufacturers sometimes offer special financing (including 0% APR car deals) if you’ve got excellent credit and during certain times of the year (like holidays).

Online car loans are a popular way to get car financing. Rates are competitive if you have good credit and they can be easier to qualify for if you have bad credit. Online car loans can come with higher fees than other types of loans, though.

Buy here, pay here financing should be used as a last resort. With these loans, the car lot itself funds your loan. Many people turn to buy here, pay here when they can’t get approved anywhere else, but these loans typically come with sky-high APRs.

4. Decide if you’re buying or leasing

Having a limited budget doesn’t mean you have to drive a jalopy. Still, that doesn’t mean you need a brand-new car, or that you need to buy a car at all. Here are a few things to consider when you’re asking yourself, “How much car can I afford?”

New car: New cars are pricier and their car insurance premiums are generally higher, too. But new cars are also covered by manufacturer’s warranties and are generally more reliable. The bigger upfront cost can lead to savings on maintenance and repairs.

Used car: Cars lose value as soon as you drive off the lot, so buying used can save on the sticker price. Plus, certified pre-owned vehicles usually come with warranties to cover specific repairs.

Lease: If your only goal is to reduce your monthly auto payment, a lease may be the way to go. Experian reports that the average lease payment stands at $581 a month (while new cars are at $737). While you won’t become the owner of the car after the lease runs out, you can save by leasing a brand new car instead of buying.