# How much car can I afford?

One of the most important things to figure out when shopping for a new or used car is to figure out how much of a car you can afford.  The price of the car you purchase will have a big impact on your auto loan and your monthly auto loan payments.  You can use an Auto Loan Calculator to help figure out how much of a car you can afford to buy.  The specific type of auto loan calculator that will help you is called an Auto Affordability Calculator.

An important question to ask yourself is, “How much of a monthly car payment can I afford based on my monthly income?”  Only you can answer this question.  A good rule of thumb is that you should spend no more than 10 – 15% of your take home pay on your car payment.  So let’s say that your take home pay is \$1,800 per month.  The rule of thumb would suggest that your auto loan payment shouldn’t be anymore than \$270 per month.  You may determine that you can spend more or less on your monthly car payment based on your individual circumstances.

## Using an Auto Loan Calculator to Determine Affordability

Once you have an idea of the monthly auto loan payment you can afford, you can use an auto loan calculator to determine the price of the car you can go shopping for in order for you to have a monthly car payment that you can afford.  In addition to your desired monthly car payment, you will need to gather a few more pieces of information in order to get an accurate estimate.  Some of items may not apply to your particular situation.  But in every case you will need to know the auto loan interest rate and the term in order to use the auto loan calculator.:

• Desired Monthly Auto Loan Payment – Determine how much of a car payment you can afford each month.
• Interest Rate – Based on your credit, what interest rate do you quality for?
• Down Payment – The amount you plan to put down on your car loan.
• Term – The number of years of your auto loan
• Trade-In Value – The value of the car you are trading in.
• Amount Owed on Trade – The amount of any outstanding balance you owe on the car you are trading in.

You will need to input this information into the auto loan calculator.  Each of these items has an impact on the amount of car you can afford.  These inputs can either serve to increase or lower the amount of car you can afford for a given monthly payment.  For example, the larger the down payment you make, the lower your monthly payments and the higher the price of the car you can afford.  The interest rate on your auto loan will impact your affordability as well.  An excellent credit rating with a low interest rate will help you afford a higher priced car versus a higher interest rate.  A shorter term for your auto loan versus a longer term will serve to decrease the amount of automobile that you are able to purchase.  The lower the interest rate on your loan, the lower your monthly payments and the more car you can afford to purchase.  Trading in a vehicle will certainly help you get a higher priced vehicle but the more you owe on that vehicle you are trading in, the less it helps you.  In fact, if you owe more on the vehicle than it’s worth, this negative equity will actually add to your auto loan and reduce the amount of vehicle you can afford for a given monthly payment.

## Auto Loan Affordability Calculator – An Example

Let’s use our example from above.  Let’s say you can afford a monthly car payment of \$270 per month.  Let’s also assume that you plan to finance this vehicle over 60 months or 5 years.  Let’s assume you have excellent credit and quality for an interest rate of 2% and that you are planning to put \$3,000 down on your new vehicle.  Using our auto loan affordability calculator,  we estimate that you can afford a vehicle priced at \$18,404.  The amount of your auto loan would be \$15,404 because you are putting \$3,000 down.  To demonstrate the impact of changing some of the assumptions, let’s assume that you are willing to finance the car for 7 years instead of 5.  Assuming you still want a monthly payment of \$270 and are putting \$3,000 down, having a longer auto loan term (two additional years), allows you to shop for a car with a sticker price of \$24,148.

Determining how much of a vehicle you can afford is a personal decision and is different for all of us.  Our easy to use auto loan calculators can help you estimate your price range as well as analyze the impacts of different assumptions like term, down payment and interest rate.