How Much of a Car Payment Can I Afford?
By Paula Pant. Budgeting & Personal Finance Expert
Paula Pant is an award-winning personal finance journalist. She runs the popular personal finance site Afford Anything and she frequently writes, speaks and makes media appearances to discuss money management for ordinary American families.
How much of a car payment can you afford?
Let's turn this question on its head for a moment.
Most people want to know about the maximum they can borrow for a car. But that's the wrong question.
The better question is: What's the minimum that you need to spend on a car, in order to get the features that you require?
If you need a reliable, 4-door vehicle to transport your family, what's the lowest price at which you can find such a vehicle?
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Can you get a used Toyota Corrolla or Ford Focus for $10,000? And if so, do you qualify for the payments?
"What's the least that I can borrow?" is a better question that "what the most that I can borrow?"
"But I Want a Nicer Car!"
The top objection that I hear is that people want a nicer car. They don't want a used Ford Focus; they want a brand-new Lexus.
If that's your dream car -- great! But don't dig yourself into debt in order to buy the car of your dreams. Save the cash for a nicer car, and buy it when you can truly afford it (i.e.
"Seriously, How Much Can I Afford?"
This being said, you might still be wondering how much you can afford in monthly payments. Here's how you can figure this out:
Step 1: Find the trade-in / resale value of your current car.
Step 2: Subtract that from the price (including taxes, dealer fees, etc.) for your desired next car. The amount remaining is your out-of-pocket.
Step 3: Divide that amount by 60. This represents the principal payment of the car loan over the next 5 years (it does not include interest).
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Step 4: Add $100/mo to this number. (Remember, you need to leave wiggle room for the interest payments and the car insurance, in addition to the principal amount. The interest and insurance will vary, depending on your APR and the value of your car, but as a general ballpark, plan on spending at least $100/mo on a combination of interest plus insurance. Read more: How to Keep Car-Related Costs in Check .)Source: budgeting.about.com