Understanding what kind of car you can afford
Factors like your down payment, monthly payment, loan term, whether or not you’re trading a vehicle in and your credit score are all helpful in calculating how much car you can afford. Additionally, getting estimates for other car-related expenses like your car insurance or annual maintenance can give you a better picture of how much you’ll spend on your car over time. Read up on each factor to learn about how they affect your car budget.
Because it’s recommended you spend no more than 10% to 15% of your monthly after-tax income on your car payment, your monthly payment will significantly influence the kind of car you can afford. If your monthly take-home pay is $3,500, then that means that your car payment shouldn’t exceed $350 to $525.
You can lower your monthly payment so that your payment better fits your monthly budget by choosing a longer loan term. However, it’s important to keep in mind that a longer loan term means that you’ll pay more in interest over time.
The amount of money you’re able to put down on your car purchase helps you afford more car. Most experts recommend that you put at least 20% down on a car because new cars depreciate quickly. A 20% down payment will prevent you from going upside-down (owing more than your car is even worth) on your loan in a few years.
The loan term, or length of your loan, influences how much you end up spending on your car. Shorter loan terms mean higher monthly payments but less money paid in interest over time, and longer loan terms mean lower monthly payments and more money paid in interest over time. If you’re interested in paying less overall, a shorter loan term is best if you can afford it. But if you need to make your monthly payment more affordable, a longer loan can help you do that.
Trading in a car can also help you afford a more expensive car or make it so that you need to borrow less money. For example, perhaps you want to purchase a $22,000 car and you’re trading in a car with a trade-in value of $8,000. If you’ve paid off your trade-in, that $8,000 would make your net car purchase only $14,000.
In the event you haven’t paid off your trade-in but have a small amount left on your loan, the dealer will buy out the rest of your loan using some of your trade-in value. Using the same example, if you had $2,000 remaining on your loan, this would be subtracted from your trade-in value. Then only $6,000 would be credited toward your purchase, making your net purchase price $16,000.
Credit score and loan interest
Your credit score impacts the interest rate of your car loan and ultimately influences how much you pay for your car in total. Higher credit scores tend to have lower interest rates, but the type of car you’re buying can also affect your interest rate. Used cars tend to have higher interest rates, while new cars have lower rates.