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Crash Course:
- Most experts suggest that you can spend between 10% and 15% of your take-home pay on car payments.
- You’ll need to figure other costs such as gas, maintenance, and repairs into how much car you can afford.
- Car loan calculators and the prequalification process can help you determine what you can reasonably pay for a vehicle.
“How much car can I afford?” is one of the first questions people ask when considering a new or used vehicle purchase. Fortunately, there are now several tools that make finding your auto purchase budget simple, quick, and easy. But determining your budget is just part of the equation – you’ll also need to find a lender unless you plan on paying in cash for your next car.
In this article, we outline a few ways to find out how much car you can afford, along with some general information about auto financing. We also walk you through how to secure the best auto loan rates and use your loan to buy your next new or used car.
How Much Can I Afford for a Car Purchase?
Most financial experts recommend spending no more than 15% of your monthly take-home pay on car payments. Whether you’ll be making loan or lease payments, this figure remains the same. While this simple rule of thumb can be useful when you first start thinking about how much you can afford to spend on a car, there are a few other things to take into consideration.
How Much Car Can I Afford Based on Salary?
How much money you make plays the biggest role in determining your monthly budget for a car purchase or lease. Experts’ 15% rule is great guidance to follow, but it’s important to note that it refers to your take-home pay and not your total salary.
Take-home pay refers to the amount you’re left with after taxes and other costs are deducted from your paycheck. Those deductions include things like Social Security, retirement contributions, child support, and more. The amount you receive after these are taken out of your salary is the figure you should use – not your gross pay.
Car Affordability Factors
While your take-home pay is one of the biggest parts of the affordability equation, there are other factors that play a role. These include:
- Sticker price: Of course, the price of the car you want to buy is a major factor in whether you can afford it. Depending on your income, car loan payments for some vehicles may simply be out of reach.
- Debt payments: The amount you’re required to pay each month toward debts such as credit cards, student loans, personal loans, and more will be subtracted from your take-home pay.
- Interest rate: Even a small difference in the annual percentage rate (APR) for a car loan can have a big impact on the total cost of the loan and your payment amount.
- Taxes and fees: Sales tax, registration fees, and other costs are also part of the total purchase price. That means they’ll also factor into what you can afford to pay for a car.
- Ownership costs: While not strictly related to your purchase budget, you’ll need to leave room in your personal budget for maintenance, fuel, car insurance, and other car ownership expenses.
- Loan term: Longer loan terms come with lower monthly car payments, but they tend to add to the total loan cost.
How To Get an Auto Loan You Can Afford
Unless you’re able to buy a car with cash, you’ll need to secure financing to make your purchase. While the process can seem stressful – as any major financial move can – you can greatly improve your chances of finding the best rates available to you with the following simple steps.
1. Determine Your Budget
The first step in securing a loan is getting an accurate idea of how much you can afford in terms of monthly payments. We’ve covered the 15% rule of thumb, but there are tools that can give you a much more accurate estimate and additional information.
Car Loan Calculators
You can find car affordability calculators from many online sources. These tools can provide a relatively precise estimate of your purchase budget. Some can even give you a more detailed breakdown of certain loan details like amortization rates and how much you’ll pay in interest.
To use a car loan calculator, you’ll need to provide some basic information about your finances and other factors. This includes your income, monthly debt payments, housing expenses, and the state where you will purchase the vehicle. You may also be asked to provide your credit score.
Where To Find Your Credit Score
When you apply for financing, lenders will pull your credit score as part of the process. But knowing your score before you start applying for auto loans can help you get a clearer picture of how much you can afford to spend and what loan rates you might qualify for.
There are a few places you can get your credit score:
- Your financial institution: These days, many banks, credit unions, and other financial institutions offer free credit score monitoring or deliver regular score reports. If you don’t know whether your institution offers this service, you can ask a representative.
- Free credit reports: You are entitled by law to one free credit report from each of the three major credit reporting agencies every year. If you haven’t used your free reports from Equifax, TransUnion, or Experian, you can request one.
- Credit monitoring services: You can also pay for premium credit monitoring from the three bureaus and other companies. In addition to being able to get your score at any time, these services offer more detailed information and services such as credit freezes upon request.
What Determines Auto Loan Rates?
Typically, when you see a lender’s advertised APR, it’s the lowest rate available. Your rates will vary depending on your personal finances. Some of the factors the determine auto loan rates include:
- Credit score: Your credit score is the single biggest factor in the APR you get from lenders. People with higher credit scores typically get lower interest rates and vice versa.
- New vs. used car: Lenders tend to offer lower rates for new car loans than they do for used car loans.
- Loan term: While they usually have lower monthly payments, longer loan terms sometimes come with higher interest rates.
- Down payment: Whether your down payment is from cash or through trade-in value, the more you put down on a car at purchase, the less money you’ll need to borrow. This often translates to a lower APR.
- Discounts: While lenders don’t tend to offer as many discounts as auto insurance companies, some still offer a couple of savings opportunities. Many auto lenders offer a discount for setting up automatic payments, for example.
2. Find Auto Loan Providers
Potential car buyers have many sources for auto financing. Where you get your auto loan from can make a big difference in the rates you pay and other features of the loan. Auto lenders tend to fall into four main categories.
Traditional Lenders
Banks, credit unions, and other traditional financial institutions are an obvious choice for finding financing. Auto loans are one of the most common types of loans, and nearly every financial institution offers them. You can typically apply for financing in person, over the phone, or online.
New Car Dealerships
Most car dealerships have in-house financing resources. The rates and loan details you’ll find, however, can vary depending on the type of dealership you buy your car from.
Financing at branded dealerships for popular automakers is often backed by major financial institutions. While it isn’t always the case, sometimes dealerships are able to offer some of the lowest rates available – with APRs as low as 0% in some instances. However, attractive rates can be part of a high-pressure sales pitch in which dealerships tack on items and services such as an extended car warranty plan.
Used Car Dealerships
Financing options are typically much different at used car dealerships. Often referred to as “buy here, pay here” car dealers, these dealerships are unlikely to offer competitive rates. In fact, you’re much more likely to find some of the highest rates on the market at these dealerships.
In addition, loans from these dealerships can come with other downsides. For instance, some used car dealerships add devices that track your vehicle while you’re paying off the loan. Some of these devices can even disable your car if you miss a payment. Buy here, pay here dealers often charge borrowers for these devices as well.
One upside to used car dealerships as a source of financing is that they will often work with borrowers that other lenders won’t. While the rates and restrictions may not be ideal, it may not be a bad option for those who have limited financing opportunities.
Online Lending Services
Like anything else you’d buy these days, you can also turn to the internet for auto loans. In recent years, online lending services have become more plentiful with more specialized options.
Internet-based auto loan services come in many forms. Some are simply the online face for a traditional lender. Others are their own entities, with no physical presence to speak of. You’ll also find auto finance brokers that connect borrowers with lenders that fit their needs.
While many of these options offer a similar generalized approach to auto financing, some are more specialized. For example, you can find car lending services that specifically work with borrowers who have low credit scores or other credit issues. These can be good options for people who have trouble securing a car loan elsewhere.
3. Get Prequalified or Preapproved
When you’ve found a few lending options you like, the next step is to get either prequalified or preapproved for an auto loan. While these have some similarities, there are critical differences between the two.
What Is Prequalification?
Prequalification is essentially an estimate from a lender for how much you can afford to spend on a car. To get prequalified, you typically self-report your financial information to a lender. Then, the lender determines a budget for you based on that information.
As a result, prequalification only involves a soft credit check. This doesn’t require a full report of your credit and therefore doesn’t impact your credit score. However, it also doesn’t guarantee financing, either.
What Is Preapproval?
Preapproval, on the other hand, is an official statement from a lender that you are qualified for a loan up to a certain amount. Preapproval is conditional on a few things, such as the age and condition of the vehicle. But as long as a vehicle meets a lender’s guidelines, a preapproval all but guarantees financing.
Unlike getting prequalified, preapproval requires a hard credit check. This is a full, detailed report of your credit history along with your score. A hard pull of your credit will temporarily lower your credit rating. However, in recent years, credit bureaus have begun counting multiple hard credit inquiries of the same type within a short span of time as only one hard pull. That means that you can get preapproved by multiple lenders without any additional impact to your score.
Prequalification vs. Pre-Approval: When To Use Each
Prequalification and preapproval are both useful tools that can serve different purposes in the car buying process. Since prequalification doesn’t impact your credit, it’s good to use when you are still in the early stages of car shopping. It’s typically more accurate than a car loan calculator when it comes to telling you how much you can afford to spend on a car.
Preapproval, on the other hand, is much more useful when you are nearing your purchase decision. Dealerships can essentially treat a preapproval as cash. In fact, they often come in the form of a check issued by a lender that is good for amounts up to the preapproved limit. Not only does preapproval allow you to shop with confidence, but you can also use it as a negotiating tool if you think the dealership can offer you lower rates than the lender.
4. Find Cars You Can Afford
Now that you have a more precise budget (or preapproval), you can find cars that you know you can afford. There are, of course, many places to find both new and used cars.
As tempting as it is to use most or all of your purchase budget, it’s important to remember that you do not have to. Staying under budget leaves more room in your finances for emergencies and changes to your financial situation.
Dealerships
If you want a new vehicle, the dealership is where you’ll most likely need to go. But most car dealerships also sell used and certified pre-owned (CPO) vehicles as well. Many now have their inventories available online to make it easy to browse from home.
However, one of the major advantages of physical dealerships is the ability to walk around and see your options in person. Cars at dealerships usually have their sales prices and vehicle details posted as a sticker on one of the windows. You’ll also get to test-drive vehicles you’re interested in.
Used Car Lots
A used car dealership also offers the in-person browsing experience for those who prefer it. However, many of these are smaller businesses than branded car dealerships and have more limited inventories.
It’s possible that you can find a good deal at a used car lot – or negotiate your way into one. But if you browse one of these lots, make sure to look up car values on sites like Edmunds or Kelley Blue Book (KBB) to see what kind of deal you’re getting. It’s also a good idea to insist on a test drive and an independent inspection to make sure the car is what it seems.
Car Buying Services
Some financial institutions offer in-house car buying services. These services help prospective buyers find cars that are eligible for the lender’s financing.
This does leave you out of much of the car shopping experience, which some people enjoy. But many lenders that have car buying services offer lower rates or discounts for using them.
Online Marketplaces
Car marketplaces where people can buy and sell vehicles completely online have become a popular option over the last decade-plus. They bring the online shopping experience to the car buying process, delivering easy-to-compare options and user-friendly interfaces. Most offer the option to deliver your vehicle to you, meaning you never have to leave home to buy a car.
Since these marketplaces draw from a national vehicle stock, they often provide a wider selection. However, prices also tend to be higher on marketplaces than they are at in-person dealerships or through private sales. The convenience of using these marketplaces comes at a cost that some may not consider worth it.
Classifieds
Classified ads are still a viable option for purchasing a car. While they still exist in print media, online classifieds are more popular and easier to browse. Individuals can use them to list their cars for private sale, but dealerships often list some of their vehicles in classified ads, too.
Local and national classified ads are often great places to find a used car you can afford. However, many lenders won’t finance private auto sales. That means that if you see a car at a good price listed by an individual, you’ll need to either find a lender that does offer auto loans for private sales or find a different car.
5. Finalize Your Loan
The final step in the loan process is finalizing it with a car purchase. If you have preapproval and the car you select fits your lender’s requirements, the rest of the process should be fast and smooth. Otherwise, you’ll have the option of working with the car dealer’s in-house financing options or securing an auto loan with another lender while you finish the sale.
After the loan is finalized, you are obligated to meet your monthly payment requirements until you have paid it off. Missing payments can result in a negative impact to your credit, penalty fees, or even having your vehicle repossessed.
Conclusion: How Much Car Payment Can I Afford?
Typically, financial experts suggest that you can afford to pay up to 15% of your take-home pay toward lease or loan payments. A car loan calculator can help you get a better idea of your budget. Make sure to account for other car expenses like insurance costs and maintenance.
If you decide to take out a loan to buy a car, you can find financing from several sources. Depending on your situation and preferences, certain lending options may be better for you than others. But no matter where you look for financing, you’ll find the best rates by shopping around and getting offers from multiple lenders.
Recommended Affordable Auto Loan Providers
No one lender is the best option for everyone. Since you can now get preapproval from multiple lenders without additional impact to your credit score, our team strongly recommends doing so. You can start your search with these companies from our list of the best auto loan providers.
Chase Auto: Best Big Bank Loan
If you already have one or more accounts with Chase or you prefer the experience of working with a large financial institution, Chase Auto is a strong option. On top of its already-competitive rates, the bank offers a discount to Chase private banking clients. It’s also one of only a few large lenders that doesn’t have a minimum credit score, which means low-credit borrowers may be able to secure an auto loan from a well-established lender.
Consumers Credit Union: Excellent Credit Union Loan
Consumers Credit Union doesn’t have the lowest rates of our top providers, but it does offer some of the most flexible terms. There are no minimum or maximum loan amounts and borrowers can choose terms up to 84 months. You need to be a member to get an auto loan from Consumers Credit Union, but anyone can join for a $5 fee – which the credit union places into your savings account after joining.
How Much Car Can I Afford?: FAQ
How much car can I afford based on salary?
How much car you can afford isn’t just based on salary. In addition to your monthly income after taxes, your monthly debt obligations are also a factor. Most experts suggest that you spend no more than 15% of your take-home pay on car payments, although you may qualify for more.
How much should I spend on a car if I make $100,000?
If you make $100,000 per year, financial experts suggest that you should spend no more than $830 per month on car payments. You may qualify for higher monthly payments, but staying under your maximum budget gives you more room to save and insulate yourself from unexpected financial issues.
Can you afford a $30,000 car making $60,000 salary?
Even if you can technically afford the payments on a $30,000 car making a $60,000 salary, most experts would advise against it. In general, most financial advice suggests that you shouldn’t buy a car that exceeds 35% of your annual income at most, and that it’s best not to spend more than 15% of your monthly take-home pay on car payments.
Our Methodology
Our expert review team takes satisfaction in providing accurate and unbiased information. We identified the following rating categories based on consumer survey data and conducted extensive research to formulate rankings of the best auto loan providers.
- Industry Standing: Trust and reliability are two of the most important qualities in a lender. Our team considers current industry ratings from organizations such as the Better Business Bureau (BBB) along with factors such as a company’s age.
- Availability: We examine how easy it is for borrowers to get a loan from each provider. Lenders that offer loans to meet a variety of customer needs receive high ratings.
- Loan Details: Our researchers comb through the fine print to learn about the loan amounts, term lengths, and types of loans each provider offers.
- Rates and Discounts: We take an in-depth look at the range of rates each provider offers for borrowers of different credit scores. Our team also factors in the discounts available with each lender.
- Customer Service: Our team considers customer reviews and complaints when determining this score. We also consider the ease and availability of help online, over the phone, or in person.
*Data accurate at time of publication.
