How Much Should My Car Payment Be?

Read Time: 6 minutes

When purchasing a new car, most experts recommend spending no more than 10% to 15% of your net income on your monthly car payment. And it shouldn’t exceed 20% when factoring in car insurance, registration, gas, and maintenance. Understanding how much car you can afford is crucial to living within your means. 

Keep reading as we explore what goes into your car payment and help you figure out how much you can afford.

How are car payments determined?

Before you figure out how much your car payments should be, it’s important to understand what goes into a car payment. You’ll find that most of these things can be in your control.

  • Price of vehicle: The price of the vehicle will heavily influence your monthly car payment. Keeping all other factors equal, the more expensive the car, the higher the payment.
  • Down payment: The down payment you use for the car is going to impact several things. Not only will it reduce the amount you need to finance, but the higher your down payment, the better your auto loan interest rate will likely be.
  • Trade-in value: If you’re trading in a car, the amount you receive for the trade-in can also reduce the amount you need to finance.
  • Amount financed: The amount you’re financing will equal the price of the vehicle minus your down payment and trade-in amount. This is the amount your car payment will be based on.
  • Credit score: Your credit score will directly impact the interest rate when applying for an auto loan. The better your credit score, the lower your interest rate and car payment will be.

How to determine how much car you can afford

Now that you know what goes into a car payment, let’s explore how to determine how much car you can afford. This is going to be a critical step before you even start looking at cars. You need to understand your budget, or else you might be looking at cars that aren’t affordable for you.

Figure out your monthly net income

To understand how much your car payments should be, you need to start with your monthly income. If you’re an employee of a company, this can be as easy as looking at your pay stub to see your income after taxes, insurance, and 401(k) contributions have been taken out. 

However, if you’re self-employed, this isn’t quite as simple. Instead, see how much you’ve earned on average over the past six to 12 months after you’ve set aside for estimated taxes. You can use this number to calculate your net monthly income.

Calculate Your 15% Maximum

Earlier, we mentioned that you should never spend more than 15% of your net monthly income on a car payment. To figure out your budget, take the net income you just figured out and multiply it by 15%.

For example, let’s assume your monthly net income is $4,000. You would figure out 15% of $4,000, which would be $600.

$4,000 x 0.15 = $600

This means the maximum you should spend on your monthly car payment would be $600. However, to be more conservative, you could keep it to 10%, which would be $400.

Include Additional Expenses

Your car payment isn’t the only car expense you’ll have each month. You need to know a few other things to calculate your total monthly budget.

  • Car registration: You’ll pay a fee to renew your vehicle’s registration each year. The amount will vary depending on the vehicle’s type and age.
  • Insurance: You must have car insurance, regardless of your state. Most states require liability insurance, but to ensure you’re fully protected, you should also have collision and comprehensive coverage. The premiums you pay will depend on many factors, including your vehicle and driving record. 
  • Fuel: Don’t forget about fuel. You’ll need to pay for gas each month to be able to drive your car.
  • Maintenance: You won’t deal with maintenance each month, but you’ll want to remember that you’ll need to have the oil changed regularly, and over time, you’ll need new brakes and other things done to the car.

Get Preapproved to see how much you can borrow

You’ve already figured out the maximum car payment you can afford each month based on your income, but that doesn’t mean the bank will give you that much of a loan. When determining how much money you can borrow and at what interest rate, lenders will look at several things.

  • Your credit score
  • Loan term
  • New or used car

Figure out your maximum car purchase price

Now that you know how much you can borrow, you can figure out the maximum purchase price you can afford. You’ll need to consider a couple of other things to do this.

Do you have an existing car you’re planning to sell and use the proceeds towards your new car? You’ll need to understand its value to know how much you might be able to get when you sell it.

Kelly Blue Book has a feature that estimates your car’s worth based on whether you’re planning to trade it in at a dealer or sell it privately. 

You’ll also need to factor in a down payment if you plan to use one. Larger down payments give you a lot of flexibility. You can either afford a more expensive car or reduce your monthly payments on a more affordable car.

The table below will give you a visual of how your trade-in and down payment can affect the amount of car you can afford.

Down payment$3,000
Loan amount$20,000
Maximum car price$32,000

Based on the table above, you can afford a car up to $32,000, including the purchase price and any taxes and registration fees.

Calculating Your Car Payment

The best way to figure out what your car payment would be is to use an auto loan calculator. These will allow you to enter the purchase price, down payment, trade-in value, loan term, and interest rate. Using all of this information will provide you with how much your monthly payment would be. 

How to reduce your car payment?

If you’re looking at cars that don’t quite fit your budget, you can do a few things.

  • Consider a less expensive car: If the car you’re considering doesn’t fit within your budget, the best thing you can do is look for a less expensive car that will reduce the loan amount you’ll need.
  • Increase your down payment: If you still have your heart set on the car you’ve chosen, you can increase your down payment, which will also reduce the amount you need to borrow.
  • Increase your credit score: While increasing your credit score will take some time, it will impact your auto loan interest rate. By increasing your credit score, you’ll be able to receive a lower interest rate, which will decrease your monthly car payment.
  • Delay purchasing a car: Although car prices have started decreasing slightly, they’re still inflated from where they were several years ago. If you can hold off on purchasing a new car, you may be able to take advantage of further price reductions.

The Bottom Line

We all have our dream cars. Unfortunately, that doesn’t mean we can afford them. When purchasing a new car, it’s important that you don’t spend more than 15% of your monthly take-home pay. This will ensure you can comfortably afford your car payment and your other monthly expenses.

Sean Bryant

Sean Bryant is a Denver-based freelance writer specializing in personal finance, credit cards, and real estate. With more than 15 years of writing experience, his work has appeared in many of the industry’s top publications including Time and Investopedia . He holds a Bachelor of Arts degree in economics.

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