How Much Car Can I Afford?

Are you in the market for a new or new-to-you car?

If so, you’ve probably wondered “How much car can I afford?”

While your local car dealership might be happy to tell you the sky’s the limit regarding your car purchase, your personal budget might be telling you a different story.

Spending more than you can afford on a car turns that car from a blessing into a burden.

How Much Should I Spend on a Car?

Deciding how much to spend on a car starts with knowing your current financial numbers. You'll need to know your current income, expenses, and savings amounts.

Know Your Numbers

Several financial factors influence how much you should spend on a car. The amount of money you earn, of course, needs to be taken into account.

When determining how much you earn, always use your net take-home pay to start with. From there, factor in the other financial obligations you have.

In other words, look at your budget. If you don’t normally use one, now is a good time to start. Having a clear view of all other monthly financial obligations will help you better determine how much you can afford.

The 50-30-20 budget plan can be helpful. In short, the 50-30-20 budget plan works like this:

  • 50 percent of your budget goes toward must-have and must-do obligations, such as housing expenses and child care
  • 20 percent of your budget goes toward savings and debt obligations
  • 30 percent of your budget covers unnecessary expenses and “fun” money

There are many ways to design a budget, but the 50-30-20 budget gives you a good place to start. It will certainly point out if any areas are totally out of whack.

What Do You Have in Savings?

Having a healthy savings account balance is important when making a car purchase as well. If you don’t have an emergency fund with a balance equal to three to six months’ worth of expenses, building that emergency fund up should be a priority.

With an added car payment, having a plush savings balance will help you ensure you can cover the new payment even if you hit a financial bump. Or, for instance, if the car needs repairs.

Determine the Total Cost of the Car

Once you have looked at your budget and determined the amount of money per month you are comfortable spending on a car you'll want to be clear on the total car costs before you make your purchase. Affording a new car isn’t simply about the payment.

There are several other costs associated with car ownership, such as:

  • Insurance policy costs
  • Fuel and parking costs
  • Maintenance and repair costs

You can call your insurance company ahead of time and get a quote for the new vehicle you're considering. If you are still trying to narrow down what type of car you want check out this post from It lists the most and the least expensive cars to insure.

Fuel costs are fairly easy to determine. A Google search will give you the MPGs of any car you could think of. Compare that to your current car to see if your costs will change.

Maintenance and repair costs can be harder to determine but you can get an idea by using averages across a brand. Here's an article from Autowise that displays the cheapest and most expensive cars to maintain.

Be sure to factor in an accurate estimate of these additional car ownership costs as you determine a purchase price and payment amount you’re comfortable with.

Get the Right Kind of Car Loan

Doing your due diligence as you shop for a car loan is important as well. You do not have to get financing through the dealership. You will likely do better getting a loan yourself through your bank. At the very least, have an understanding of what rate you would qualify for before heading into the dealership so you know if they are offering you a fair rate.

Know that your current credit score will likely affect the loan rate you pay if you borrow money to purchase a vehicle. The higher your credit score, the lower rate you qualify for, and the difference can be vast.

In Experian’s State of the Automotive Finance Market, a quarterly report from Experian (latest being Q1 of 2020), we see the wide range of interest rates auto loan holders pay based on their credit score. Ranging from about 4% for the lowest risk borrowers (super prime), up to just over 20% for the highest risk borrowers (deep subprime).

To show you how much your credit score could affect your payment, let’s do a quick calculation. Let’s say you’re borrowing $25,000 for five years for your car purchase.

If you’ve got a credit score of 800 and are paying a four percent interest rate, your monthly payment on that loan would be $460. However, if you’ve got a credit score of 650 and are paying a 12 percent interest rate, your payment jumps up to $556 a month–almost a $100 a month difference.

As you can see, your credit score has a substantial impact on the interest rate you could pay for your car loan. As such, it’s important to work diligently to get–and keep–your credit score as high as possible.

Beware Of The Monthly Payment Myth

Don’t fall for the monthly payment myth. It’s common for car sales teams and auto loan lenders to focus on a vehicle’s monthly payment amount as opposed to the total price of the car. In other words, “If I can afford the payment, I can afford the car.”

Many times buyers don't even know what the sales price of the car actually is! When you are negotiating with a salesman, stay focused on the actual sales price, and worry about the monthly payment during the financing.

Also, the longer-term you sign up for on your auto loan, the more interest you’ll pay over time.

For example, let’s say you sign up for a $553 per month payment for a 4-year term. If you’re paying a five percent interest rate, you can get a $25,000 car. You’ll pay $1,561 in interest.

Conversely, let’s take that same $553 a month payment and stretch it out to a 6-year term, you can get a $36,400 car. However, you’ll have payments for two extra years and you’ll pay over double the amount of interest you pay, at $3,420.

If you only focus on the monthly payment you wouldn't even realize you were spending 45% more on the car.

Consider Paying Cash

Another option many financial experts suggest is to limit your car buying power to the amount of money you have saved in cash. By using the cash you’ve already saved up to purchase a car, you may not be able to get as nice or as new of a car as you’d originally had in mind, especially if you need to get a car right away.

However, not having car payments would allow you to save the monthly amount you would have been spending to pay cash for a better car in the future.

When it comes down to it, only you can decide how much of a car you can afford. Possibly one of the most important tips you can heed is to beware of taking on a car payment amount or term that will substantially limit you financially.

In other words, don’t put yourself in a position where your car payment limits you from having other monetarily-driven fun in your life. Making sure your car gets you from A to B while meeting your transportation needs is really the most important factor.


It's up to you how much of your budget you want to devote to transportation. When shopping for a new car keep the focus on the actual sales price of the car, not the monthly payment. Also, remember that the cost of owning a car is more than just the purchase price. Insurance, gas, and maintenance will also play a part – so keep that in mind when shopping around.

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About Jim Wang

Jim Wang is a forty-something father of four who is a frequent contributor to Forbes and Vanguard's Blog. He has also been fortunate to have appeared in the New York Times, Baltimore Sun, Entrepreneur, and Marketplace Money.

Jim has a B.S. in Computer Science and Economics from Carnegie Mellon University, an M.S. in Information Technology - Software Engineering from Carnegie Mellon University, as well as a Masters in Business Administration from Johns Hopkins University. His approach to personal finance is that of an engineer, breaking down complex subjects into bite-sized easily understood concepts that you can use in your daily life.

One of his favorite tools (here's my treasure chest of tools,, everything I use) is Personal Capital, which enables him to manage his finances in just 15-minutes each month. They also offer financial planning, such as a Retirement Planning Tool that can tell you if you're on track to retire when you want. It's free.

He is also diversifying his investment portfolio by adding a little bit of real estate. But not rental homes, because he doesn't want a second job, it's diversified small investments in a few commercial properties and farms in Illinois, Louisiana, and California through AcreTrader.

Recently, he's invested in a few pieces of art on Masterworks too.

>> Read more articles by Jim

Opinions expressed here are the author's alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.

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  1. Steveark says

    I’m glad you included the part about paying cash. I think the single biggest anchor holding down middle class prosperity is an addiction to car payments. If you pay cash only you may drive crappy cars but you’ll have something better, money! My daily driver has 199,000 miles on it and I could afford any car I want. But mine runs just fine.

    • Jim Wang says

      I think there are a lot of different anchors but the assumption that it’s OK to always have a car payment is certainly up there. Plus, you don’t have to drive a crappy car! I’d argue that someone who is driving a car for 199k miles is driving one that’s been well maintained or it wouldn’t have made it that long. It won’t be a new car with all the bells and whistles but it’s not always going to be crappy.

  2. Gary Horacek says

    Good advice. One more factor that car shoppers should note is depreciation. The minute that new car leaves the lot, it’s value is significantly impacted. To take advantage of that fact, one can shop for a used car that is a several years old. Sage advice I once heard was: save up and buy a seven year old car with cash. Continue saving while enjoying that car, then when ready, sell your car and buy a four year old car with cash. Then either stay at four years old or upgrade to a new car for cash the next time. Four year old cars are in the sweet spot. Lot’s of miles left on them and priced right. Drive them until they get weak and then buy another four year old car. Sounds like a plan. Personally, I’ll never buy another new car. My 2010 Honda Civic has 200K miles and I fully expect it will go another 100K with any care at all. If I were to go car shopping today, I’d be looking for 2015 -2017 vintage cars with low miles (plenty to choose from too) and pay cash.

    • Jim Wang says

      I find that the sweet spot is definitely in that 3-4 year range – just have to make sure you don’t get a previous rental! 🙂

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