Car Affordability Calculator

How much should your car payment be? Find out with our auto loan calculator!
Car Affordability Calculator

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How much should your car payment be?

The average monthly car payment is $738 for new cars and $532 for used.

With costs that high, it’s important to carefully consider how much you can realistically afford to spend on a car payment each month. This guide will walk you through the key factors to determine a monthly car payment budget that works for your financial situation.

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How To Determine Your Budget

Before determining how much to spend on a car payment, it’s important to have a clear understanding of your overall budget.

This involves taking a close look at your monthly income and expenses to determine how much is left over for a car payment.

You’ll want to be sure to account for all expenses, not just housing, food and utilities. Things like entertainment, clothing, gifts, vacations, and savings goals should all factor into your monthly budget.

Once you’ve accounted for your fixed expenses, you can determine your disposable income, which is the amount left over each month after essential expenses are paid. This is the pool of money you have available to put toward a car payment.

It’s recommend to keep your car payment below 10-15% of your take-home pay. However, you may want to budget even less for a car if you have other financial goals or obligations. The goal is to find an affordable monthly payment that fits within your overall budget.

How much should you have for your Down Payment?

The down payment is the amount you pay upfront when purchasing a car. Financial experts recommend a down payment of at least 20% for a new car and 10% for a used car.

This reduces the amount you need to finance and helps get you a lower interest rate.

The pros of a larger down payment include:

  • Lower monthly payments since you are financing less
  • Lower interest charges over the life of the loan
  • Shorter loan terms may be available with less financing needed
  • Lower chance of the loan being upside down or owing more than the car is worth

The cons of a larger down payment:

  • Requires harboring a larger amount of cash upfront to put down
  • Ties up more of your money in the vehicle instead of other goals
  • May not be possible for everyone’s budget

Overall, putting down as much as you can reasonably afford is recommended. Aim for 20% if possible, but even 10% can provide benefits over very low down payments. Just be sure you still have emergency savings left over after your down payment.

Choosing Your loan Term

The average car loan length today is around 5-6 years, though terms can range from 12 months to 96 months. When choosing a loan term, there are some key factors to consider.

Pros of a longer-term (72-84 months)

  • Lower monthly payments since the balance is spread over more months [2]
  • Allows you to purchase a more expensive vehicle that may be out of reach with a shorter term

Cons of a longer-term:

  • You end up paying more interest over the life of the loan as you’re borrowing the money for longer
  • There’s a higher chance of being “upside down” on the loan (owing more than the car is worth)

Pros of a shorter term (24-48 months)

  • You pay less interest since the loan is paid off faster
  • You build equity in the vehicle more quickly
  • Less risk of being upside down if you want to trade in or sell the car

Cons of a shorter term:

  • Higher monthly payments since the balance is spread over fewer months
  • May limit your options on vehicle price and model

Overall, choosing the right loan term involves weighing factors like monthly budget, interest rates, and plans for keeping the vehicle long-term. A longer-term may help get lower payments but cost more overall, while a shorter term builds equity faster but requires higher monthly payments. Consider your financial situation carefully.

Understanding Interest Rates

Interest rates have a significant impact on monthly car payments. In general, the higher the interest rate, the higher the monthly payment will be.

This is because interest charges make up a portion of each monthly payment. At lower interest rates, more of the monthly payment goes toward paying down the principal balance. At higher rates, a larger portion goes toward interest charges.

For example, on a $20,000 5-year car loan, a 5% interest rate results in a monthly payment of around $377, while an 8% rate increases the payment to $409.

That’s over $400 more in total interest paid over the life of the loan when comparing a 5% rate to an 8% rate.

When getting an auto loan, it’s important to shop around for the best possible interest rate based on your credit score and history.

Even a small difference of 1-2% in rate can save hundreds over the loan repayment period.

Those with excellent credit scores in the 700s and above generally qualify for the lowest rates, while those under 620 may pay higher rates. Comparing options from banks, credit unions, and online lenders can help find the most competitive rate for your situation.

New vs Used Cars

Monthly payments for new cars tend to be higher than for used cars. According to NerdWallet, the average monthly payment for a new car as of February 2024 is $738, compared to $532 for a used car.

There are several reasons for this difference:

New cars depreciate rapidly in the first few years. A used car has already taken that initial depreciation hit, so its price is lower. This results in lower monthly payments.

Interest rates may be higher for new cars. Lenders view new cars as riskier investments since they depreciate so quickly. Used cars may qualify for lower interest rates.

New car buyers often opt for more expensive models with more features. Used car buyers tend to opt for more basic, affordable models to save money.

Manufacturer incentives like cash rebates are usually stronger on new models, bringing down the price. Used cars don’t have this incentive.

So while new cars offer the latest features and technology, buying used is a proven way to save significantly on monthly payments over the life of the loan. Carefully consider new vs used based on your budget and needs.

Makes & Models

More expensive cars typically have higher monthly payments. Luxury and sports cars often cost significantly more than basic transportation vehicles, so their payments are higher as well.

For example, the average monthly payment for a new Toyota Camry is around $530, while the average for a new BMW 5 Series is over $1,100.

This holds true for used cars as well. Opting for a high-end make and model will increase your monthly expenditure versus choosing a common, economy car. It’s important to balance your desires and budget – a pricier car may not be the best financial decision if it strains your budget. Consider all the costs involved before committing to a more expensive vehicle.

Insurance & Fees

One major expense to account for is car insurance. The monthly average cost of car insurance for drivers in the U.S. is $193 for full coverage and $54 for minimum coverage as of April 2024.

The cost can vary significantly based on your age, driving record, location and other factors. Make sure to get quotes from multiple providers to find the best rate.

In addition to insurance, remember to budget for registration fees and taxes which can add several hundred dollars per year. Some states have annual vehicle property taxes as well. If you’re buying a used car, you may need to pay sales tax on the purchase price.

Lifestyle Factors

Your lifestyle and needs should factor into how much you spend on a car payment. If you have a large family, you may need a larger vehicle like an SUV or minivan.

This will likely increase your monthly payment. Consider how many kids you need to transport and how much cargo space is required.

Commute distance is another aspect to factor in. If you drive long distances for work, you may prioritize fuel efficiency and comfort. This could mean opting for a more expensive hybrid or luxury model. However, if you live close to work or use public transit, you likely don’t need to spend as much on a car.

Your lifestyle habits like outdoor activities can also impact your choice. If you go camping or need to haul equipment, consider an SUV or truck.

But if you rarely use extra cargo space, a sedan could suit your needs at a lower price point. Evaluate how you plan to use your vehicle day-to-day.

Key Takeaways

  • Aim to keep your monthly car payment below 10-15% of your take-home pay. This percentage allows room in your budget for other expenses and financial goals. According to experts, this is an affordable range for most budgets
  • Consider your unique financial situation when setting a budget. Factors like existing debt, savings, housing costs, and lifestyle should influence how much you can realistically afford for a car payment each month.
  • Look for opportunities to save through an upfront down payment, choosing a used vehicle, or shopping around for the best interest rates. These strategies can help you get the car you want while staying within your ideal budget.
  • Create a budget you can stick with long-term. Avoid overextending yourself with a high monthly payment that strains your finances. Shop smart, secure favorable financing terms, and focus on long-term affordability.
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