How Much Car Can I Afford? Here’s How You’ll Know

How much car can I afford

While I’m generally a pretty frugal person, cars are my weakness. I’ll scrimp and save on food and clothes, but splurge on vehicle upgrades and accessories. That flaw caused me a lot of trouble when I was in graduate school. Despite knowing better, I bought my dream car, a 15-year-old Mitsubishi 3000 GT with over 100,000 miles.

What car can I afford?

This monster was my baby, but she nearly bankrupted me.

The purchase price was cheap, so I didn’t think it was a big deal. However, I failed to think about all of the other costs that come with car ownership like insurance, gas, and repairs. I quickly became “car poor,” and later was forced to sell it just to make ends meet.

It’s easy to make a mistake like I did. Car dealers are quick to stress that you can get a low monthly payment, but neglect to mention how long your loan will be. They certainly don’t tell you what you’ll pay in other fees.

“How much car can I afford,” you ask? Here’s what you should consider before buying.

How much cars typically cost

If you plan on purchasing a car, be prepared for sticker shock. In January, the average transaction price for a new car was $34,968, reported Kelley Blue Book.

Although buying a used vehicle can help you save thousands, they’re not exactly cheap either. An Edmunds report found that used cars cost an average $19,227.

According to the car information site, your car payment should not exceed 15 percent of your take-home pay. If your after-tax income is $2,500 a month, that means your car payment shouldn’t be over $375.

However, that recommendation doesn’t take into account other major monthly payments. If you’re a recent graduate, you might need to be even more conservative and take into consideration other factors.

If you live in a high-cost area with expensive housing or have a large student loan balance, you might only be able to afford 5 to 10 percent of your gross income on a car. That limit can make it more difficult to buy but also save you from headaches later on.

Other car expenses to consider

To figure out how much you can spend on a car, write down a list of all of your expenses, including rent, utilities, student loan payments, groceries, cell phone bills, and Netflix subscriptions. Subtract those expenses from your total take-home income, and that’s how much discretionary income you have that you can use to pay for a car.

However, that doesn’t mean you can spend that whole chunk on the vehicle itself. The cost of owning and maintaining a car can be in the thousands. To figure out what your annual cost is, consider these factors:

  1. License, registration, and fees: To get your car tag and title, you’ll spend about $500, according to AAA.
  2. Car insurance: In 2016, The Zebra reported average vehicle insurance costs of $1,323 a year, or $110.25 a month.
  3. Fuel: If you have a car that gets 30 mpg and drive 10,000 miles a year, and gas costs $2.35 a gallon, you’ll pay $783 annually for gas.
  4. Maintenance: Even if your new car is in good condition, it will need regular oil changes and air filter replacements. Depending on your vehicle, this can add about $20 a month to your charges — and that doesn’t take into account larger expenses, like replacing tires or fixing belts or brakes.

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If you pay the average cost for all of the above, you’ll need $2,846 to maintain your car, or $237 a month, in addition to the thousands you’ll pay toward the car’s price.

How much car can I afford?

That $237 a month on insurance and maintenance cuts into how much you can spend to buy a car. If, based on the 15 percent rule of thumb, you had $375 in discretionary income, that means you’d have just $138 a month to put toward a car payment.

That’s why many people opt for an extended loan. Today, the average auto loan is a scary six-and-a-half years. Although the longer repayment period will lower your payments, you’ll pay far more in interest over time. And, because car values depreciate every year, you could end up owing more than the car is worth.

To make sure you don’t overextend yourself, try to keep your car loan as small as possible. If you have to go beyond a five-year loan term, the car is probably out of your budget. That means if you have $138 per month to put toward a car and have a $1,000 down payment, the most you can spend is $8,100.

To find out how much you can afford based on the monthly payment you have available and the loan term, use Edmunds’ affordability calculator.

Test drive your car payments

If you’ve worked out how much your new ride will cost you, and the numbers sound good on paper, test them out before heading to the car dealership. You might find that you missed recurring expenses, or that you like to have more wiggle room to go out to eat or meet friends for drinks.

To see if the payment will work for you, set a trial period of three to six months. On the first of each month, deposit your entire payment and maintenance costs into a separate bank account. If you can put that money away each month without needing it to pay bills, you’ll likely be able to afford your car. If you can’t, you might have to revisit your budget or look for a cheaper vehicle.

As an added incentive, using this strategy can also help you build a down payment for the car. If you put $375 into the bank for six months, you’d save $2,250 to put toward the purchase. Also, your targeted car might drop in price during that time, helping you score a better deal.

Buying a car you can afford

Answering the “How much car can I afford?” question can be tricky. It’s important to remember other car-related expenses so you don’t overextend yourself and end up with a vehicle you can’t afford (like me). Setting a strict budget and understanding all the other costs can ensure you’ll comfortably manage your payments.

If you know what car you want and how much you can pay, follow the tips in the complete guide to buying a car to get the best deal.

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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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