If I want to buy a car, how much can I afford?

If I want to buy a car, how much can I afford?
5 Min Read

When we want to buy cars, we have to consider how much can we afford the cars from four steps.

Buying a new or used car may bring high price tags. At high prices, you may find yourself asking, "If I want to buy a car, how much can I afford?"? You can determine what price of the cars we can afford from the following four steps to solve this problem. Firstly, calculate your monthly car payment. Secondly, determine your fuel and insurance costs. Then calculate your car loan amount. Finally, set the purchase price.

#1 calculate your monthly car payment

Financial experts suggest spending no more than 10% to 15% of your monthly take-home salary on auto loan payments. These percentages do not include the total cost of the car, including gasoline, insurance, repair and maintenance costs.

Calculate how many cars you can afford according to your monthly payment starting from your annual income. The following table shows an example of annual salary and monthly payments that should not be exceeded for car loans.

In addition, it is important to realistically determine how long you want to pay each month. Most loan companies offer 24 to 84 months for used and new cars. Choosing a longer loan term can help you get a lower monthly repayment, but you will pay more in total due to the accumulated additional interest.

#2 determine your fuel and insurance costs

Before buying or renting a car, please consider your fuel cost and the cost of car insurance. These two charges depend largely on your situation, such as your location and driving history and the vehicle you choose.

For auto insurance quotation, please contact your agent or your interested insurance company. You can easily get auto insurance quotes from the company to know what you will pay. When calculating the monthly car payment and total cost, try to keep the total cost below 20% of the monthly take home salary.

#3 calculate your car loan amount

Once you have calculated your monthly affordable payments, you can begin to determine how much you can borrow. The amount a lender allows you to borrow depends on several factors, including:

Your credit score: this will affect the annual interest rate (APR) of the loan and how much the bank is willing to lend you.

Your loan term: This is the month when you must repay your car loan.

Whether you buy a used car or a new car: the APR of a new car loan is often lower than that of a used car.

#4. Set the purchase price

The total loan amount you calculated for your car may not be the price you paid. Please pay attention to details other than the sticker price when buying a car.

Considering the monthly repayment amount and total cost of car loan. The car loan calculator is a useful tool when it uses factors such as loan terms, down payment and interest rate. Some calculators may also include sales tax, fees and the trade-in value of your current vehicle.

In the long run, calculating how many cars you can buy can help you save time and money. At the same time, several factors will affect your auto loan interest rate, including your loan amount, your down payment, your loan term, your credit score, and the type of vehicle you choose (rental, second-hand or new).

If you have a tight budget when considering your purchase options, explore all options before buying a car: leasing, buying a used car, buying a new car, bank or credit union, dealer, third-party loan, etc.