Thinking about financing a car and wondering how much you can afford? Never spend more than 20 percent of after-tax household income on ALL vehicles in your household. Let me provide an example:
Let’s say your take-home pay of $25,000 per year (is $2,000 deposited in your bank account each month?) Limit yourself to spending only $5,000 per year for car payments, gas, maintenance, and insurance. If your combined annual expenses for insurance, fuel, and maintenance is $3,800, then you have $1,200 of the original $5,000 limit for your car payments. $1,200 divided by 12 equals $100 per month for car payments. Yes, $100 per month for car payments.
Buying a car you can’t afford is one way to waste a lot of money. Use an online auto loan calculator to learn how much your $100 per month car payment can buy you at current loan rates.
Thirty percent of cars you see on the road have a $475 per month payment. That means one-third of car owners are either taking home $9,500 per month or they are borrowing more than they can afford.