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When it’s time to buy a car, you’ll probably want to know: “How much car can I afford?” Financial experts answer this question by using a simple rule of thumb: Car buyers should spend no more than 10% of their take-home pay on a car loan payment and no more than 20% for total car expenses, which also includes things like gas, insurance, repairs and maintenance.
Once you know the monthly car payment you can afford, you can calculate how much you can afford to borrow for your car loan. With that, you can set a realistic target price and finally answer the question, “What car can I afford?”
Use our car affordability calculator to quickly see what’s right for your budget.
How to use the car affordability calculator
Most car payment calculators start with the total loan amount you want and other inputs to see what your monthly payment would be. NerdWallet’s car affordability calculator starts with the monthly payment you choose and shows you what loan amount you can afford, and how the APR and loan term change the total loan amount.
To use NerdWallet’s car affordability calculator, input the monthly car payment you’ve decided you can afford and the length of loan you want. Then select “new” or “used” and your credit tier. NerdWallet estimates an APR based on the average APR for new or used car loans in that credit tier using data from Experian Information Solutions. You can try different loan terms and adjust the inputs to further customize your loan amount.
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How to determine how much car you can afford
Calculating how much car you can afford before you visit the dealership can save you hundreds, maybe thousands, of dollars in the long run — and you won’t be putty in the hands of a car salesman.
We’ll walk you through the key steps:
1. Calculate the car payment you can afford
NerdWallet recommends spending no more than 10% of your take-home pay on your monthly auto loan payment. So if your after-tax pay each month is $3,000, you could afford a $300 car payment. One way to be sure is to make the payment into a savings account for a few months, and to note what you're giving up to do so.
It’s important to be realistic about how long you can or want to be making this monthly payment. The new will wear off in a few months; soon, you'll look at the vehicle you buy the way you do the one that's currently in the driveway. NerdWallet recommends maximum loan terms of 36 months for buying a used car and 60 months for new cars.
Taking a longer loan term will reduce your monthly payment, but over time you’ll pay much more in interest. Also, a longer loan term increases your risk of becoming upside-down on the loan, meaning you owe more than the car is worth.
2. Calculate the car loan amount you can afford
Now that you’ve calculated your affordable monthly car payment amount, you can start to get a sense of how much you can borrow. This will depend on several other factors, including:
Your credit score, which will in part determine your annual percentage rate, or APR, on the loan.
Your loan term: how many months you have to pay off the loan.
Whether you buy new or used. New car loans tend to have lower APRs.
With a monthly payment, an estimated APR and loan term, the car affordability calculator works backward to determine the total loan amount you can afford.
3. Set a target purchase price
The total loan amount you can afford isn’t necessarily the price of the car you can afford. If you’re making a down payment or trading in your old car, you’ll be able to buy a higher-priced car, or borrow less money. (Use our auto loan calculator to see how your down payment or trade-in credit affects your monthly payment and loan amount.)
Additionally, there will be sales tax and fees, so think about more than just the price on the window sticker. Once you estimate the car loan amount you can afford, and assuming no trade-in credit or down payment, you can begin to get a realistic idea of the purchase price you should consider. In the current shortage-driven market, expect to pay a market adjustment — extra profit tacked right onto the sticker price — on many popular models.
You’ll need to factor in sales tax and fees, which vary by state, to the advertised cost of the car to get your total car price. An easy way to estimate these extra expenses is to add 10% to the advertised price of the car (even though you might negotiate a lower price). For example, if you see a car advertised for $20,000, you should assume your total cost — the “out the door” price — will be $22,000.
If you want to get a more precise estimate, here’s a breakdown of the typical extra costs:
Sales tax: Typically 5% to 10%, and may include state, county and local taxes.
Registration fees: Estimate these fees by using your state’s department of motor vehicles site.
Documentation fee: Ranges from $80 to $400, depending on your state.
This means that if you can afford a $20,000 car loan, again, assuming no down payment or trade-in credit, you’ll want to shop for a car with a sticker price of around $18,000 so that you’ll be able to cover sales tax and fees with your total loan amount.
Finding a car you can afford
Many automotive sites, such as Kelley Blue Book, Edmunds and AutoTrader, have car finder search tools to show you different models listed by price. But remember to set the bar low. When searching for cars, set your maximum price below the total loan amount you think you can afford. Sales tax and fees can easily add up to an extra few thousand dollars.