You know what car you want but then you find yourself wondering, “How much car can I afford?”
There are different ways to think about what an “affordable” car means for you. There’s the purchase price of the car and then, for the majority of buyers who finance their purchase with a car loan, there’s the monthly payment.
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We’ll help you determine an affordable monthly car payment and how much that monthly payment might let you borrow. That way, you can set an appropriate target price for the car.
Running through these numbers 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.
Car affordability rules of thumb
Before we get down to brass tacks, we should explain that many financial experts recommend that total car expenses — your monthly payment, plus insurance, gas and maintenance — be less than 15% to 20% of your take-home pay.
To avoid stretching your budget, it’s a good idea to spend less than 10% of your monthly take-home pay on your car loan payment. Determine an affordable car payment for you using the calculator below.
Be realistic about how long you can or want to be making this monthly payment. NerdWallet recommends maximum loan terms of 36 months for buying a used car and 60 months for new cars.
Keep in mind that taking a longer loan term may increase the amount you can borrow, but over time you’ll pay much more in interest. Also, it increases your risk of becoming upside-down on the loan, meaning you owe more than the car is worth.
How much can you afford to borrow?
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 long you have to pay off the loan).
- Whether you buy new or used (new car loans tend to have lower APRs).
Use the calculator below to see how much you might be able to borrow based on the monthly payment you can afford. Our car affordability calculator also shows how the APR and loan term affect the total loan amount.
Setting 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.)
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When you’re shopping for a car, think about all of the expenses, not just the sticker price.
Additionally, there will be sales tax and fees, so you need to 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 get a realistic idea of the purchase price you should consider.
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” cost — 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.