How Much Can I Afford For a Car? (With Calculator) (2024)

All APR figures last updated on 3/16/2024 – please check partner site for latest details. Rate may vary based on credit score, credit history and loan term.

Purchasing a new or used car can come with a hefty price tag. According to Kelley Blue Book, the average new car price topped $48,334 in July 2023, while used cars averaged around $27,000 in August of 2023. With such steep prices, you may find yourself asking, “How much car can I afford?”

We at the MarketWatch Guides Team will explain how much you should spend on a car loan payment and your options for purchasing and financing a new or used car. When you’re shopping for a vehicle, it pays to compare the best auto loan rates and best auto refinance rates from providers.

An auto loan calculator can help you determine the monthly payment and total cost of an auto loan you may qualify for. It uses factors such as your loan term, down payment and interest rate. Some calculators may also incorporate sales tax, fees, and your current vehicle’s trade-in value.

Calculating how much car you can afford may help you save time and money in the long run. Several factors affect your auto loan rate which includes:

• Your loan amount
• Your down payment
• Your loan term
• Your credit score
• The type of vehicle you choose (lease, used or new)

To help you find your monthly budget, we’ve outlined four steps below.

#1 Calculate Your Monthly Car Payment

Use your annual income as a starting point to calculate how much car you can afford based on monthly payments. Financial experts recommend spending no more than about 10% to 15% of your monthly take-home pay on an auto loan payment. These percentages do not factor in total car expenses, including gas, insurance, repairs and maintenance costs.

The table below shows examples of annual salaries and the monthly payment amount you should not exceed for a car loan:

Also, it’s important to be realistic about how long you want to make monthly payments. Most lending companies offer 24 to 84-month auto loansfor used and new cars. Choosing a longer loan term can help you get lower car payments, but you’ll pay more overall because of the additional interest that accumulates.

#2 Determine Your Fuel and Insurance Costs

Before you purchase or lease a vehicle, consider how much your fuel expenses will be and how much car insurance will cost. Both of these costs depend heavily on your situation, such as your location and driving history and the vehicle you’ve chosen.

The U.S. Department of Energy provides a detailed list of fuel economy figures as well as a comparison tool that allows you to check different vehicles’ annual fuel cost estimates.

For auto insurance quotes, reach out to your agent or an insurance company you’re interested in. You can easily get car insurance quotes from companies to get a sense of what you’ll pay. When calculating your monthly car payment and total expenses, try to keep your total costs to less than 20% of your monthly take-home pay.

#3 Calculate Your Car Loan Amount

Once you’ve calculated your affordable monthly payment, you can begin to determine how much you can borrow. The amount a lender will let you borrow depends on several factors, including:

• Your credit score: This will affect the annual percentage rate (APR) on the loan and how much the bank is willing to lend you.
• Your loan term: This is how many months you’ll have to pay your auto loan off.
• Whether you buy a used or new car: New car loans tend to have lower APRs than used cars.

#4 Set a Purchase Price

The total loan amount you calculated for your car may not be the price you pay. When shopping for a car, pay attention to details other than the sticker price. In most states, you’ll have to pay sales tax and fees whether you buy a new or used car.

Here’s a breakdown of how much you can expect to pay in fees or taxes:

• Sales tax: Up to 11% and varies by state
• Registration fees: Typically range from $50 to $300, although some states, like Georgia, charge as much as $2,465 on average
• Documentation fees: Generally between $100 and $500, depending on your state

Making a down payment or trading your old car in can help you borrow less money when purchasing a vehicle.

There are several ways to finance a car purchase, including going through your bank, getting a loan from a dealership or using a third-party loan provider. We’ll explain each one in more detail below.

Bank or Credit Union

Traditional lenders like banks and credit unions generally offer lower rates or special deals for those who bank with them. If you have a good track record with your bank, it can provide you with a letter stating how much you are approved to borrow. You can then use the letter to buy a car or negotiate with other lenders to get a better deal.

Dealership

Most auto dealerships, especially those affiliated with manufacturers like Ford, Honda or Toyota, work with lenders that arrange car loans for qualified borrowers on-site. Some dealers also offer loans through national and regional banks that provide automotive financing.

When you sign on for a loan at a dealership, your monthly payments will be sent to the partner bank or finance company that backs your loan. Your vehicle’s title will be mailed to you once you’ve repaid the loan.

Online Auto Loan

An online auto loan offers a faster approval process than a standard auto loan and more flexible terms to fit your needs and help you get the vehicle you want. Buyers with bad credit who can’t get loans through traditional means may be able to find third-party auto lenders that are willing to loan them money.

The biggest drawback to using a third-party auto lender is the interest rate you’ll pay. Most third-party loan providers require higher returns on their money than traditional lenders like banks or dealerships.

If you’re on a tight budget, explore all of your options before purchasing a car. Several choices are available, including leasing or buying a used or new car.

Leasing

A car lease allows you to essentially rent a car from a dealership for a certain length of time and mileage. It can be a good option since the monthly payments are lower than those for buying the car outright. However, keep in mind that you’ll have a mileage limit and the money you pay toward your car won’t bring any value to you.

Buying a Used Car

Purchasing a used car gives you more freedom than a car lease. Used cars tend to be priced significantly lower than new cars, making monthly payments more affordable. Additionally, car expenses such as insurance tend to be lower for used vehicles.

Buying a New Car

If you want to finance a new vehicle, do your research so you know which make and model you want. Knowing a car’s fair market value will help you negotiate the best deal possible at a dealership.

While there are no set limits for how much car you can afford, there are many guidelines that financial experts suggest. You can calculate how much you can afford to pay manually through our steps or use an affordability calculator. Before you decide on a car loan provider, make sure to explore your options to find the best deal.

Our Recommendations for Car Financing

Shopping around with auto loan providers can help you get lower interest rates. Most banks, dealerships and third-party loan providers will give you free quotes. We recommend reaching out to Auto Approve for free quotes on auto loan rates.

Auto Approve: Top Choice for Refinancing

We named Auto Approve one of the best auto loan companies of 2022. It has a reputation for being a refinance auto loan specialist, and the company’s lease buyout option makes it a viable option for those looking to purchase a vehicle. Auto Approve offers rates as low as 2.25% APR for those with good credit scores.

Keep reading: Auto Approve review

RateGenius: Top Choice for Good Credit

RateGenius offers drivers with a minimum approval credit score of 640 the opportunity to refinance their auto loan on cars, trucks, and SUVs. It features a large loan amount range from $12,000 to $100,000, making it an effective option for those with good credit. RateGenius also offers rates as low as 3.09% APR for those looking to purchase a vehicle or refinance their auto loan.

Keep reading: RateGenius review

Because consumers rely on us to provide objective and accurate information, we created a comprehensive rating system to formulate our rankings of the best auto loan companies. We collected data on dozens of loan providers to grade the companies on a wide range of ranking factors. The end result was an overall rating for each provider, with the companies that scored the most points topping the list.

Here are the factors our ratings take into account:

• Reputation (30% of total score): Our research team considered ratings from industry experts and each lender’s years in business when giving this score.
• Availability (20% of total score): Companies that cover a variety of circ*mstances are more likely to meet borrowers’ needs.
• Loan Details (15% of total score): We considered the types of loans, term lengths and loan amounts that are available from each lender to determine this score.
• Rates (25% of total score): Auto loan providers with low APRs scored highest in this category. Available discounts were also taken into account.
• Customer Experience (10% of total score): This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness and helpfulness of each lender’s customer service team.

*Data accurate at time of publication.