How Much Car Can I Afford?




Total Monthly Budget: $

Max Affordable Car Price: $

Determining how much car you can afford is an important step in making a sound financial decision. There are several factors to consider, including your income, expenses, debt, and credit score.

Concepts

Two simple formulae can help you get started:

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Dianne has the above-average mental ability, but she is poorly motivated in class. That is why she has low grades in her academic performance. Is she?

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25/36 rule

The 25/36 rule states that your monthly car payment should not exceed 25% of your monthly after-tax income and your total monthly transportation costs (including car payment, insurance, gas, and maintenance) should not exceed 36% of your monthly after-tax income.

20/4/10 rule

The 20/4/10 rule states that your down payment should be at least 20% of the purchase price, your loan term should be no more than 4 years, and your monthly car payment should be no more than 10% of your monthly net income.

Formulae

There is no one-size-fits-all answer to how much car you can afford. However, there are a few simple formulae that can help you get started:

Calculate your monthly after-tax income

This is the amount of money you have left over after taxes are taken out of your paycheck.

Calculate your monthly debt payments

This includes your credit card payments, student loan payments, and any other monthly debt payments.

Calculate your monthly transportation costs

This includes your car payment, insurance, gas, and maintenance.

Use the 25/36 rule or the 20/4/10 rule to determine how much car you can afford

Benefits

There are several benefits to determining how much car you can afford before you start shopping:

  • It can help you to budget for your car purchase.
  • It can help you to avoid overspending on a car.
  • It can help you to qualify for a loan with a good interest rate.
  • It can help you to avoid financial problems in the future.

Interesting Facts

  • The average monthly car payment in the United States is $728.
  • The average American household spends 18% of its income on transportation.
  • The average American has a car loan balance of $19,273.
  • The average American keeps their car for 11.9 years.

Use Cases

Determining how much car you can afford is important for making a sound financial decision. Here are some use cases where this information would be helpful:

  • If you’re planning on buying a new or used car.
  • If you’re considering leasing a car.
  • If you’re thinking about refinancing an existing car loan.

References

Here are some references that provide more information on this topic:

  • Financial Mathematics: An Introduction by Irvin H. Siegel and John W. Van Horne (2013)
  • Investments by Zvi Bodie, Alex Kane, and Alan J. Millerron (2018)
  • Corporate Finance by Richard Brealey, Stewart Myers, and Frank Allen (2016)
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