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how much car can you afford?

Guide to Understanding the Numbers

If you’re thinking about buying a car but aren’t sure what kind of car you can afford, you may be tempted to first look at the sticker price. But, trust us, there is a more efficient way to head into the dealership knowing the kind of car — and car price tag — that works for you.

The best thing to do is figure out the monthly payment that fits your financial situation. You can do this by working backward from your total loan amount (principal and interest rate), and factoring in other things such as car insurance costs, fuel budget, and the term of your car loan. We’ll show you how to calculate these things to estimate your monthly car payment so that you can confidently answer the question, “how much car can you afford?”

Loan Amount

Any car affordability calculator will first have you enter your desired loan amount. This can be tricky because you’re trying to figure out how much you should borrow in the first place! However, if you have a general idea of the make and model you need or would like, the average price for that vehicle should be a good benchmark.

You’ll also want to include the desired (or likely) interest rate for your auto loan. Any prospective lender will look at your credit report to determine how much interest to charge on your loan. If you haven’t recently done so, it is a good idea to review your annual credit report before you begin applying for loans. To help you gain mastery of your credit, ALEC offers a credit assessment calculator so that you can get a workable idea of where you stand with your credit score.

Life of Your Loan

It’s crucial to know the length of your loan term before getting started with an auto loan. The fact is, the longer you finance the auto, the lower your payment. However, the trade-off is that you’ll pay more in total interest. As you determine how much car you can afford, as well as the length of your loan, you’ll have to determine whether it’s more important to save money in the long term or have more money in your bank account month-to-month. This will give you an idea of the best loan term for you.

Once you have a ballpark idea of your loan amount, interest, and term, you are well on your way to estimating your monthly payments. Dividing your loan amount by the number of months in your loan term should give you a working estimate of your monthly car payment. But, keep in mind that if your credit improves or your budget changes during the life of your auto loan, you often have the option to refinance for a shorter term.

Additional Costs

Of course, there is more to car ownership than paying principal and interest over a set period of months. There are other costs and fees associated to consider, which can include:

  • Car insurance
  • State taxes
  • Car registration fees
  • Typical fuel usage and associated costs

These things together can add up, so it’s a good idea to have a working understanding of how they will fit into your budget on top of your car loan payments.

Let ALEC Help You Discover How Much Car You Can Afford

In practical terms, it’s not quite so much the sticker price of the car that matters — it’s whether you can comfortably make payments on it, month after month, and maintain your lifestyle. Here at ALEC, we have the tools and resources you need to make the right decision.

Ready to get started? Once you know how much car you can afford, it’s time to consider pre-approval and other car-buying tips. Read more on how to get the best deal!