Start with your budget, not the vehicle price
A vehicle may technically qualify for financing without being comfortable for your household budget. Before deciding how much car you can afford, start by determining how much money you can reasonably devote to transportation each month.
That amount should account for more than the loan payment. A car also creates recurring expenses such as insurance, fuel, maintenance and registration.
A $500 monthly loan payment does not mean the vehicle costs only $500 per month. Insurance, fuel, maintenance and other costs can substantially increase the amount that leaves your budget.
Costs to include when estimating affordability
Loan payment
The required principal-and-interest payment based on the amount financed, rate and loan term.
Auto insurance
Insurance costs can vary significantly by vehicle, driver, location, coverage and insurer.
Fuel or charging
Estimate what you are likely to spend based on mileage, efficiency and local energy prices.
Maintenance and repairs
Tires, oil changes, scheduled service and unexpected repairs should be part of the ownership budget.
Registration and fees
Registration, inspection and other recurring vehicle costs can vary depending on where you live.
Parking and tolls
Regular parking, commuting tolls or garage costs can materially affect the monthly budget.
Determine a comfortable monthly payment
One practical approach is to work backward from the monthly amount you can comfortably spend rather than starting with a vehicle price.
Review your monthly income and existing expenses, including:
- Housing
- Credit cards
- Student loans
- Personal loans
- Childcare
- Utilities
- Food
- Savings goals
- Other recurring obligations
After accounting for those commitments, decide what transportation cost leaves enough room for savings, emergencies and normal fluctuations in spending.
How a monthly payment translates into a car price
Once you have a target monthly payment, the price of the vehicle you may be able to finance depends on several additional variables.
The most important include:
- Your down payment
- The interest rate
- The repayment term
- Taxes and dealer fees
- Trade-in value
- Any balance owed on your trade-in
Changing any one of these assumptions can change the vehicle price associated with the same monthly payment.
Work backward from your monthly budget
Enter the payment you are comfortable with, along with your rate, loan term and down payment, to estimate how much vehicle that budget may support.
Use the Auto Affordability CalculatorHow the interest rate affects affordability
The interest rate determines how much interest is charged on the outstanding loan balance. When the rate increases, more of the monthly payment is needed to cover financing costs.
That means the same monthly payment generally finances a smaller vehicle price at a higher interest rate than at a lower rate.
This is one reason it is helpful to compare the amount financed and total interest rather than focusing only on the monthly payment.
Why a longer loan term can make a car appear more affordable
Extending the loan over more months can lower the required monthly payment because the repayment is spread across a longer period.
However, a lower payment does not necessarily mean the vehicle costs less. A longer repayment period may increase the total amount of interest paid and can keep you in debt on the vehicle for a longer time.
When comparing auto loans, look at the monthly payment, interest rate, term, total interest and total amount repaid together.
How a down payment changes what you can afford
A down payment reduces the amount that must be financed. If all other loan terms remain the same, borrowing less generally lowers the monthly payment and the amount of interest paid.
A larger down payment can therefore allow the same vehicle to fit a lower monthly payment target, or it may allow a somewhat more expensive vehicle to fit the same payment budget.
The trade-off is that a down payment requires cash upfront. Avoid using so much cash that you leave yourself without an appropriate emergency reserve.
How a trade-in affects affordability
A trade-in can reduce the amount you need to finance if the vehicle has positive equity.
Positive equity means the trade-in value exceeds any loan balance still owed on the vehicle.
If you owe more than the trade-in is worth, you have negative equity. If that unpaid balance is rolled into the next auto loan, the amount financed increases even though the new vehicle's selling price has not changed.
Example affordability scenario
Suppose you decide that a loan payment of about $450 per month is comfortable within your budget.
The example illustrates why vehicle affordability cannot be determined from the monthly payment alone. Sales tax, registration, dealer charges, trade-in equity and other financed amounts can change the final purchase price.
Check insurance before buying
Insurance can vary substantially from one vehicle to another. Factors such as vehicle value, repair costs, safety features, theft history and coverage requirements can affect the premium.
Before buying a vehicle, consider obtaining an insurance estimate for the specific model you are considering.
A vehicle with an affordable loan payment may be much less affordable once its insurance premium is included.
Budget for maintenance and repairs
Newer vehicles may have warranty coverage for certain repairs, but every vehicle still creates maintenance costs. Tires, brakes, fluids, inspections and routine service eventually become part of ownership.
Used vehicles may have a lower purchase price but can require more maintenance depending on age, mileage, condition and service history.
Building a maintenance allowance into your monthly budget can make these costs less disruptive when they occur.
Debt-to-income ratio and auto financing
Lenders may consider your existing monthly debt obligations relative to income when evaluating a loan application. This relationship is commonly referred to as a debt-to-income ratio.
A new auto payment increases your monthly debt obligations. Even if a lender approves a particular payment amount, you should still decide whether that payment is comfortable within your broader financial situation.
Be careful when negotiating only by monthly payment
It is easy to make an expensive vehicle appear affordable by extending the repayment term or changing the amount financed.
When reviewing a deal, pay attention to all of the major numbers:
New vs. used: affordability goes beyond sticker price
A used vehicle may have a lower purchase price, while a new vehicle may offer different financing, warranty and maintenance considerations.
Neither option is automatically more affordable for every buyer. Compare the complete ownership picture, including financing costs, insurance, expected repairs and how long you intend to keep the vehicle.
What to know before you start shopping
Walking into the buying process with a predetermined budget can make it easier to evaluate vehicles without allowing the financing structure to determine what you spend.
Before shopping, try to know:
- Your comfortable monthly loan payment
- Your available down payment
- Your approximate trade-in value and payoff balance
- Your expected insurance cost
- A realistic interest-rate assumption
- The maximum loan term you are comfortable using
The amount of car you can afford should be based on the total impact on your budget, not simply the largest loan payment a lender or dealer is willing to offer. Start with a comfortable monthly transportation budget and work backward to the vehicle price.