How much Car Loan Payment Can you Afford?

Before shopping for a car, it is recommended that you determine how much you can afford to spend on a car loan. Determining how to fit a car within your household budget presents a considerable challenge, and financial experts hold differing views on its affordability metrics. One perspective suggests that all automotive expenses—such as gas, insurance, and car payments - should not surpass 20% of your pre-tax monthly income. Conversely, another school of thought proposes that a vehicle costing approximately half of your annual take-home pay is within reach. Additionally, certain frugal personal-finance advisors advocate for limiting vehicle expenses to 10%-15% of your annual income. These terms—pretax, post-tax, annual income - can leave one wondering, "What is my affordable car budget?"

Although there's no flawless formula for affordability, a general guideline is that your new car payment should not exceed 15% of your monthly take-home pay, or 10% if you're leasing or purchasing used. This recommendation stems from the recognition that the payment alone doesn't encompass all associated expenses, such as fuel and insurance, often overlooked. Accounting for these addition al costs amounts to approximately 7% of your take-home pay. Therefore, ideally, your total budget should not surpass 20% of your monthly take-home pay.

While the 10%-15% rule may not suit everyone, it serves as a useful starting point to establish a target price that ensures you're not struggling to cover expenses each month.

How to use this Car Loan Payment Affordability Calculator?

Let’s assume that you are thinking of buy a new car. Car can come with a lot of variety (e.g., low price cars to luxury expe nsive car). You can spend any amount of money on your car purchase. However, it’s not always wise to budget an amount that could be beyond your means. This calculator will help you find out how much you should spend on your upcoming car loan.

For example, your monthly net income or monthly net take-home salary is $5,000. Now, you want to know the size of the monthly car loan payment you can afford . Based on the 20% rule, your monthly car loan payment should not be more than $1,000. Please bear in mind tha t this amount includes monthly automobile insurance payment and fuel costs too. Given this information, if you like to know your car purchase budget, check out our Automobile Affordability calculator.