back to articles | June 17, 2022 | Staci Bailey

Categories: Auto Loans & Financing Loan Calculators & Rates Vehicle & Buying Research

How to Determine What Monthly Car Payment Is Affordable for You

The costs of vehicle ownership involve factors such as the purchase price, financing, and additional expenses. Look at each component that contributes towards the cost of car ownership individually but never lose sight of the bigger picture of the overall cost


Most people don’t buy a vehicle outright with savings. For the average person buying a car means borrowing the funds to pay for the purchase. This adds layers to the transaction which make it more difficult to determine car payment affordability.

The costs of vehicle ownership involve factors such as the purchase price, financing, and additional costs. As a rule of thumb, transportation expenses should account for no more than 20% of your take-home pay. Around 10% of your net pay should go towards the car payments and the other 10% is to cover all other costs of owning a vehicle and keeping it on the road.

Vehicle Purchase Price

When looking at the price of any car you are considering, keep in mind that the sticker price is not a true representation of what you will ultimately pay for the vehicle. The price may not include all of the features you want in your car. For those you will probably have to pay extra.

Additionally there are fees such as registration and other charges that dealerships will add on. Ask about these additional costs to calculate the all in price. Finally, don’t forget about the taxes. Budget for all of these charges for a more accurate picture of car payment affordability.

Factors That Will Affect The Cost Of Borrowing

The service of money lending isn’t free. The amount you pay on your auto loan is called the interest. It is a percentage calculated on the amount that you borrow. The interest rate that you are charged is affected by several variables.

Loan Term

Your loan term is the amount of time that you have to pay back the loan. Typically a shorter term means larger monthly car payments. Paying your auto loan quickly can be a burden for your finances but it means you will pay it off earlier and you will pay less interest overall.

When car payment affordability is a concern, extending the term on a loan seems like a viable option but car buyers should be weary. While your monthly payments may be smaller, you will pay more in interest over the life of the loan. A loan term of 4 years is a good benchmark.

If you can afford to pay your loan in less than 4 years, you can save even more. However there may be situations where a term exceeding 4 years is the best choice. Ultimately only you can decide what loan term is best for you.

Down Payment

The down payment is a one time lump sum that you pay upfront prior to purchasing your vehicle. The amount of money that you have managed to save for this purpose can greatly influence how much interest you will have to pay on your loan. If you can afford to put more money towards your down payment you can reduce your monthly payments or shorten your loan term.

It is recommended that your down payment be at least 20% of the car’s value. Vehicles depreciate very quickly. A brand new vehicle’s value depreciates by 10% in the first month. If you don’t have enough for a 20% down payment you may find yourself in a situation where you owe more than the vehicle is worth.

Consider all your options. The down payment can be money that you have put aside but you might be able to scrounge up some more cash. If you already own a vehicle you can trade it in and use its value towards the purchase of your new car.

Prime rate

The prime rate is the interest rate at which banks loan money to each other and their most creditworthy corporate borrowers. It is the launchpad for most types of loans. Lenders start with the prime rate and then analyze other factors which will often increase the overall interest rate that an individual will pay.

Credit Score

Your credit score is a numeric representation of the risk you pose as a borrower. If you have been paying all your bills on time chances are you have a good credit score. But if you have fallen behind on payments, or if you have no credit history at all, then securing an auto loan may cost you extra.

The higher your credit score, the more money you will be able to save with a lower interest rate on your loan. A credit score of around 700 is considered good while over 800 is excellent. Credit scores under 580 are generally quite low and it may be more difficult to secure a car loan.

Financial Situation

Your financial situation will ultimately determine car payment affordability but it also affects what kind of interest rate you qualify for. Income, employment history, and other factors affect how much lenders will want to charge you for borrowing money.

Be honest about the state of your finances but don’t omit important details that might make you eligible for a better rate. The interest you pay on a car loan can be in the hundreds or thousands. Lowering your interest rate by just one percent can translate to substantial savings.

Other Costs Of Car Ownership

Aside from the price of the vehicle, taxes, fees, and interest, there are other costs associated with vehicle ownership. Automotive expenses include gas, insurance, regular maintenance, and unexpected repairs. These will be additional expenses you will incur as a car owner and it’s important to factor them in when determining car payment affordability.

Some of these costs will be affected by the purchase decisions you make. A vehicle that takes premium gasoline will cost you more than one that takes regular gasoline. Buying used can save you money upfront but you may spend more on repairs and maintenance. A longer loan term will probably reduce your monthly loan payment but you may get charged more for insurance. Look at each component that contributes towards the cost of car ownership individually but never lose sight of the bigger picture of the overall cost.

Assessing car payment affordability can be bewildering but there are tools that can help. myAutoloan can take the guesswork out of auto loans. Find out how much you can afford to spend on your next new car.