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What is the most affordable car I can afford? How do I calculate affordability of a car? A part of buying a Car In this series Buying a Car

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4 min read Published November 14, 2022

Authored by Rebecca Betterton Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with the details of taking out loans to purchase a car.

Edited by Helen Wilbers Edited by

Helen Wilbers has been editing for Bankrate since late 2022. He believes in transparent reporting that allows readers to confidently get deals and make best choices for their finances. He specializes in small and auto loans.

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What kind of car you are able to be able to afford is contingent on factors such as your monthly income, your credit score and the features you’d like your vehicle to have. Experts typically recommend spending no less than 20% of your take-home pay on a car. This should include the cost of fuel, insurance and more. Determining affordability requires balancing the needs of your vehicle with your budget. How can you figure out how much car you can afford to set an amount for your car’s budget begin by determining the amount you are able to afford each month. Remember to include costs like maintenance, gas and insurance, in addition to loan or lease payments. 1. Choose between buying and leasing If you’re able to make a difference in what you are able to pay for. Leasing is an alternative for those who need an affordable monthly installment and the ability to drive the most recent model automobiles. The monthly payments are for the vehicle’s depreciation rather than the total value. But, you’ll still have to put money down -as well as paying to maintain a car you’ll never own. The purchase puts you in the driver’s seat , with no limit on mileage and no additional charges for wear and tear. It’s more expensive to purchase the car than hire it on lease, so you should ensure depreciation won’t leave you . However, you’ll have the car for a long time and be able to sell it should you need to. Utilize a calculator to estimate your savings potential. What’s affordable is related to how you’ll utilize your vehicle So, make sure you know the full benefits and drawbacks of each one before you decide to purchase. 2. Consider your salary Your salary is the main factor in the decision of which auto loan is best for you. that a new car payment not exceed fifteen percent of take-home pay. A used car’s cost is not more than 10 percent, though this number can vary according to the expert. If insurance, fuel and other regular monthly expenses are included, the cost should not exceed 20% of the monthly take-home income. Your income is also important if you’re seeking to be approved for an loan. The lenders will be looking at your debt-to income ratio, or . This measure compares the amount of your bills each month to your gross monthly income. Most car dealers like to see a DTI no higher than 45 percent or 50 percent before approval of a loan according to . Even if you have the money to buy your vehicle outright but you need to consider your purchase in the perspective of your salary and other expenses. Particularly, consider the possibility of buying with cash potentially consuming or wiping out your -paying down your debt over time. The option of financing your car might not be the best option, especially in the event that you plan to spend more than the suggested amount of your monthly income to pay for a loan. For certain buyers, financing a vehicle could be a part of their larger financial overall picture. 3. Factor in additional vehicle costs Two of the largest expenses that are associated when you own a car are the costs of insurance and fuel. It is possible to look up mileage estimates for your car of choice. A car that has excellent gas mileage will help you save money every month and could help you maximize the amount of mileage reimbursement from your employer. Insurance prices also differ according to the vehicle and the individual. Two cars that look similar to you might be vastly different to the insurance company you have. A is a great place to start understanding your potential insurance costs and what factors the insurance company will take into consideration when determining a price. The most common criteria companies look at is: Your driving record. The amount you spend in your vehicle. Your location. Your age. Your gender. Your credit. The type and amount of coverage you chose. Discounts you can get. Based on the state you reside in, you may have restrictions when it comes to pricing your auto insurance. Are you able to afford the car you’d like to purchase? After you’ve got a sense about your spending budget you can determine if the car you’ve always wanted is within your reach and if you’ll require financing. Following these steps can help determine the financial viability of a particular vehicle or loan. 1. Find out how much you’ll pay The payments on your car loan are more than just the cost of the car on its own. Be aware of what’s known as the ” ” (OTD) amount that includes not just the price of your vehicle but also the cost of taxes, fees and any additional items you purchase. With research, you can find out what to expect from state sales taxes and the cost of registration and title for your vehicle. Certain fees have to be imposed by laws or the company policy, others are optional or removed. Knowing what’s possible to discuss can save time and frustration when negotiating. With an affordable OTD cost in mind, you can aim for a certain sticker price when shopping for a vehicle. Know that the OTD cost could add up to 10-15 percent to the price of your vehicle, depending on your locale. 2. You can get an estimate of the cost by using a car loan calculator. The rate of interest that you are charged on a loan important factor when calculating your monthly payment amount. A better credit score can earn you lower interest rates, which will ultimately reduce your monthly payments and the total loan cost. You can use a to find out how the different interest rates affect the amount you pay each month. This is how: Get a copy of your credit file, and learn your . Get prequalified with a few lenders to find out the interest rate that you might receive. Plug in your rate of interest, your desired duration of repayment and vehicle cost into the calculation. This is the second aspect to consider. A shorter loan term will mean higher installments, but less interest all-in. Thus, although a longer loan term can be tempting, it may be better to go with a less expensive vehicle to keep payments low. Bankrate insight

Utilize a car loan calculator to determine what your monthly payments will be before you complete the full car loan application.

3. Use a cost-to-own tool Beyond the monthly installment, you should consider if you are able to afford maintaining the vehicle. Take a look and utilize a cost-to own tool to see estimates of what you could pay. Edmunds as well as Kelley Blue Book have cost-to-own tools that account for expected fuel costs, maintenance repairs, state fees and the average depreciation. The main thing to remember is that being realistic with your budget will help you avoid pinching pennies once you have brought your new vehicle home. Before choosing a vehicle take into consideration all costs that could be incurred, not just the monthly installment. Try to find a vehicle that costs no more than 20 percent of your monthly salary. The goal is to find a vehicle that is able to meet your needs and provides you with enough cash to cover unforeseen costs or income changes.


Authored by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers with the details of borrowing money to purchase an automobile.

Edited by Helen Wilbers Edited by

Helen Wilbers has been editing for Bankrate from late 2022. He is a fan of clear reporting that helps readers easily find deals and make the best decisions for their financials. He is a specialist in small business and auto loans.

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