How Much Can I Afford For A Car

Determining how much you can afford to spend on a car is an important financial decision. Most experts recommend using the 10/15 rule - spending no more than 10% of your gross monthly income on a car payment, and no more than 15% of income on total car expenses including insurance, gas and maintenance. However, the 10/15 rule is just a guideline. There are other factors to consider as well when determining your ideal affordable car price range.

What is the 10/15 Rule for Affording a Car?

The 10/15 rule is a simple guideline used to determine how much car you can afford based on your income. It states you should spend:

No more than 10% of your gross monthly income on a car payment
No more than 15% of your gross monthly income on total car expenses including insurance, gas and maintenance

For example, if your gross monthly income is $5,000, according to the 10/15 rule:

You can afford a monthly car payment up to $500 ($5,000 x 10%)
Your total monthly car expenses including the car payment, insurance, gas and maintenance should not exceed $750 ($5,000 x 15%)

Following this guideline ensures your car expenses are a reasonable percentage of your income, so you aren't stretched financially.

However, the 10/15 rule is just a starting point. Other factors can change how much car you can realistically afford.

Why the 10/15 Rule is Just a Guideline

The 10/15 rule provides a quick estimate, but it has some limitations:

It doesn't account for your other debts and expenses that factor into your monthly budget. Even if a car payment fits under 10% of your income, that doesn't mean you can afford it if you have high rents, loans and other bills to pay.
It is based on gross income rather than net income. But your net take-home pay after taxes is a better number to use when building a budget.
It assumes 15% of income is reasonable for total car expenses. But costs like insurance and gas vary significantly based on factors like your location, driving record and type of car.
It doesn't consider your savings goals. Even if you stay under 15% of income on car costs, that may not leave enough room to save sufficiently for other goals.

For these reasons, most financial planning experts recommend taking a detailed look at your entire financial situation rather than just relying on the 10/15 guideline alone.

How to Calculate Your Affordable Car Price Range

To get a more accurate and personalized affordable car price range, follow these steps:

1. Calculate Your Monthly Net Income

Start with your gross monthly income from your job(s). Then subtract taxes and other deductions to get your monthly take-home net income.

Be sure to calculate your net income conservatively - don't inflate your income or underestimate your tax withholding. Use your monthly net income as the basis for calculating affordable car costs.

2. List All Monthly Expenses

Make a list of all your current monthly expenses and debt obligations, including:

Housing costs (rent/mortgage, property tax, insurance)
Minimum loan and credit card payments
Utilities
Food
Insurance (health, life)
Childcare and child support
Medical expenses
Entertainment
Existing car loan and maintenance
Public transportation
Clothing and dry cleaning
Memberships
Phone bill
Internet and cable
Retirement and savings contributions
Any other regular expenses

Tally up the total. This is your total monthly expenses baseline.

3. Set Target Savings Goals

In addition to your current expenses, factor in targets for:

Emergency fund - Target 3-6 months' worth of living expenses saved, or at least $500-1000 to start. This protects you from debt if you lose your income.
Retirement - Contribute at least 10-15% of your income.
Other goals - Factor in planned big-ticket expenses like vacations, home down payment, etc.

Decide on a realistic monthly savings target for these goals based on your time horizon.

4. Calculate Discretionary Spending

Take your monthly net income and subtract your total expenses and target savings contributions.

The remaining amount is your discretionary spending, the pool of money left over every month to use flexibly on costs like dining out, hobbies, entertainment or transportation. This is your limit for what is affordable on a car payment and other vehicle expenses.

5. Estimate Car Expenses

Based on your discretionary budget, calculate reasonable amounts for:

Car payment - Research average used car prices and loan terms to estimate a realistic principal and interest payment that fits your budget.
Insurance - Get quotes for the coverage you need. Insurance varies based on your age, car type, driving history and location.
Gas - Estimate your monthly fuel cost based on your commute distance and car gas mileage.
Maintenance - Budget 1-2% of your car's sticker price annually for routine maintenance and repairs or set aside a repair fund.
Registration/taxes - Check your state's fees. Registration can be $25-$150 annually, taxes up to 2% of car value.

Add these expenses up to get your total realistic monthly car costs. Compare this to your discretionary spending budget.

6. Set Your Affordable Car Price Range

Based on the car payment and total expenses you can afford, calculate a realistic purchase price range for your next car.

For example, if you can afford $300 per month for a car loan, factoring in a 60-month term, 5% interest rate and 10% down payment, your affordable purchase price is around $14,000.

Setting a price range rather than a single maximum number allows some flexibility to browse different options. But be sure to stick close to your predetermined budget.

Tips for Affording the Car You Need

If the car you need doesn't seem to fit into your ideal affordable price range, all hope is not lost. Here are some tips to potentially make a pricier car work for your budget:

Buy Used Instead of New

Choose a lightly used car over a new model. Cars depreciate the most in their first 1-3 years. Let someone else take that initial depreciation hit, so you can buy a 1-5 year old used car for much less. The car will still have plenty of life left if you maintain it well.

Get a Shorter Loan Term

Opt for a 36 or 48-month loan rather than 60 months. This raises your monthly payment but lowers your interest costs over the life of the loan. Also, you'll pay off the car faster so you can upgrade again sooner if needed.

Put Down a Substantial Down Payment

Put down at least 20% if you can, rather than 0-10%. This lowers the amount you have to finance. But be sure you have savings left over for an emergency fund.

Shop Around for the Best Interest Rate

Compare rate offers from banks, credit unions and online lenders. Good credit scores over 720 will qualify you for better rates, so work on improving your credit first if needed. Avoid high-interest dealer financing if possible.

Consider Certified Pre-Owned (CPO)

CPO cars cost a bit more than regular used cars but come with warranties, roadside assistance, inspections and other perks. This can provide peace of mind with a used car.

Extend Your Budget a Bit

If a monthly car payment stretches your budget by $50 or $100, look hard at trimming other flexible costs. Temporary lifestyle adjustments like eating out less or limiting hobbies may be worth it for the car you need.

Save Up First

Delay your purchase a few months to save up a larger down payment. This shrinks your loan amount so you need a smaller monthly payment. Every extra $1,000 you put down upfront saves you about $20 per month.

The Bottom Line

The 10/15 rule gives you a starting point, but calculating your total monthly disposable income and crunching the numbers on actual car costs gives you a clearer affordable price range. Being realistic from the start prevents being burdened with higher payments and expenses down the road. With some budget adjustments and smart shopping, you can likely find options to comfortably afford the quality car you need. Just be sure to do the math carefully.

How to Calculate How Much Car You Can Afford

Determining your affordable car budget takes some math and self-awareness. The quick 10/15 rule is just a guideline - truly figuring how much car your budget can handle requires a close look at your full financial situation. Use these steps to calculate a realistic affordable car price range for your needs and income.

Use an Auto Affordability Calculator

Online auto affordability calculators make it easy to estimate a reasonable price range. They factor in details like:

Your income
Down payment
Credit score
Loan term, interest rate and monthly payment
Insurance, gas and maintenance costs

Bankrate, Credit Karma, Autotrader and Kelley Blue Book all offer user-friendly auto affordability calculators. Enter your details for a tailored estimate.

Consider Your Monthly Budget

Don't just look at a potential car payment. Look at your overall income and expenses to make sure you have enough discretionary budget left over.

Calculate your net monthly income - Start with your gross income and calculate your take-home amount after taxes and deductions. Use this as your working income figure.

List regular monthly expenses - Tally up all your bills for necessities, debt payments, and other obligations you can't easily change.

Factor in savings goals - Budget for short and long term savings needs too like an emergency fund, retirement and other financial goals.

Find your discretionary amount - Subtract all the above from your net monthly income. This is your pool for flexible spending on transportation, dining out, entertainment, etc. Out of this, determine reasonable amounts for a car payment, gas, insurance, repairs and other vehicle costs.

Factor in Insurance, Gas and Maintenance

The car payment is just one piece of the puzzle. To follow the 10/15 rule, your total car costs including:

Insurance - Get quotes based on your age, car type, driving history and location.
Gas - Estimate your monthly fuel usage based on your commute distance and car miles per gallon.
Maintenance - Budget for routine upkeep and repairs. Plan for about 1-2% of your car's sticker price annually.
Registration/taxes - Check your state's registration renewal fees and personal property taxes, which apply annually.

Add these together to make sure your total car costs fit your discretionary spending budget. Trim elsewhere as needed to find room.

Buy a Reliable Used Car

Aim for a gently used car instead of new unless you plan to keep it 10+ years. Opt for a reliable, fuel efficient used model with lower insurance rates. Consider:

Toyota Corolla

The Corolla is famed for reliability and excellent gas mileage. A 2-4 year old Corolla can be had for under $15k.

Honda Civic

The Civic is another poster child for reliability. Spunky handling and 30+ mpg make it practical and fun. Prices start around $13k for a recent used model.

Mazda3

The Mazda3 packs style, spirits handling and a nicely finished interior into an affordable package. Lightly used models can be found for $12-14k.

Get Preapproved for Financing

Get preapproved for financing from your bank, credit union or reputable online lenders before you shop. This shows the dealer you have options, so they may offer a lower interest rate to win your business.

Put 20% Down If Possible

Put down at least 20% of the car's purchase price as a down payment if your savings allow it. This shrinks your loan amount so you only have to finance 80% of the car price.

Shop Around for the Best Interest Rate

Compare lending rates from:

Your bank or credit union
Online lenders like Lightstream or Penfed
Dealer financing (but read the fine print carefully)

Good credit scores over 720 qualify you for the lowest rates. Check your credit report for errors first and improve your score if needed.

Choose a 60 Month Loan Term Max

Opt for a 48 or 60 month loan term rather than 72-84 months. While longer loans have lower payments, you pay significantly more interest over the life of the loan.

Set Affordable Payment and Price Range Targets

Once you have realistic estimates for:

A monthly loan or lease payment
Insurance
Gas
Maintenance

Add them together to get your total monthly car costs target.

Then back into an overall affordable price range for your next car based on your ideal monthly payment amount. This gives you flexibility while car shopping.

Bottom Line

The 10/15 rule is just a rough starting point for determining affordable car costs. Crunching the numbers on your full financial picture gives you a complete realistic budget and price range for your needs and income level. This helps ensure you buy the right car for both your wallet and lifestyle.

FAQs

How much car can I afford based on my salary?

A good rule of thumb is to spend no more than 10% of your monthly take-home pay on car payments. However, this number can vary depending on your other financial obligations and expenses.

How much car can I afford based on my credit score?

A higher credit score will typically qualify you for a lower interest rate on your car loan, which can save you money in the long run. This means you may be able to afford a more expensive car with a good credit score.

How much car can I afford with my current budget?

It's important to factor in all of your monthly expenses when determining how much car you can afford. This includes your rent or mortgage, car insurance, gas, food, utilities, and other debt payments.

What are the monthly costs of owning a car?

In addition to the car payment, you'll also need to factor in the cost of insurance, gas, and maintenance. Insurance costs can vary depending on your age, driving history, and the type of car you buy. Gas prices can fluctuate, so it's important to budget for both high and low gas prices. And maintenance costs can vary depending on the age and make of your car.

How do I get a car loan?

To get a car loan, you'll need to apply to a lender. The lender will assess your credit score, income, and debt-to-income ratio to determine your eligibility for a loan. Once you're approved for a loan, you'll need to sign the paperwork and make your down payment.

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