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.
Two simple formulae can help you get started:
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.
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.
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
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.
- 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.
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.
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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Emma Smith holds an MA degree in English from Irvine Valley College. She has been a Journalist since 2002, writing articles on the English language, Sports, and Law. Read more about me on her bio page.