How Much Car Can You Really Afford?

Is your current vehicle on its last leg, or are you just ready for something new? It might be a good time to consider biting the bullet and get that new car you’ve been dreaming about. That said, buying a new car isn’t a small purchase. For most of us, it’s second to buying your home. Use these budgeting guidelines to estimate a comfortable car payment, total monthly ownership costs, and a realistic purchase price.

When you decide to buy a car, one of the questions you ask yourself is, “How much car can I afford?” In order to answer that question, you have to take a look at your budget and find out just how much you can comfortably afford. Also, remember that the type of vehicle you get will affect your monthly expenses.

Find Out What Payment You Can Afford

A common rule of thumb is to keep your monthly car payment at 10% or less of your take-home pay. And when you add up your full transportation costs (payment, insurance, fuel/charging, maintenance, and repairs), aiming for 20% or less can help you stay comfortable month to month. (If you’re also paying down credit cards, student loans, or a mortgage, you may want to stay closer to the low end.)

 Next, think about your loan term (how long you’ll make payments). While shorter terms usually mean less interest paid overall, many buyers choose terms like 60, 72, or even 84 months to keep the monthly payment manageable, especially as vehicle prices and interest rates fluctuate. If you choose a longer term, try to put more down (or buy below your max budget) so you don’t end up owing more than the vehicle is worth.

Longer loan terms can lower your monthly payment, but they can also increase the total interest you pay over time. They may also increase the risk of becoming upside-down on the loan (owing more than the car is worth), especially early in the loan or if your vehicle depreciates quickly.

Calculate the Loan Amount You Can Afford

Once you have the payment you can afford, you can calculate how much you could potentially borrow. Some factors to consider are:

• Your credit score. Your score will partially determine what your APR (Annual Percentage Rate) is on your loan. APR is the cost you pay each year to borrow money, including fees, expressed as a percentage.
• Your term, or how long you plan to make payments. At AllSouth, we offer flexible terms up to 84 months in some cases.
• Whether you decide to go with a new or used car can have an impact on your APR. New cars tend to have lower APRs but will have higher prices.

Set a Target Purchase Price

The total of the loan you qualify for isn’t necessarily the price of the car you can afford. For instance, if you’re planning on making a down payment or trading in your old car, you may be able to look at a higher-priced car or borrow less money.

There’s also going to be taxes and fees, so while you’re shopping around, think about more than just the sticker price. Additional costs you'll want to consider include title/registration, dealer documentation fees, and local taxes that can add several hundred to a few thousand dollars depending on where you live and who you buy from. In South Carolina, vehicle purchases are typically subject to the Infrastructure Maintenance Fee (IMF), which is 5% of the price (with a $500 maximum for many purchases), plus title and registration costs. 

Consider Expenses

Maintenance fees are another aspect to consider when shopping for a new car. Different types of vehicles will cost you more to maintain.

• Fuel — Depending on your daily drive, the fuel efficiency may be an important factor. If you drive a long distance to work, you may want to look at a vehicle with better mileage per gallon, or even a hybrid or electric vehicle. Fueleconomy.gov can help you out with estimating your cars MPG. If you choose a car that takes premium or diesel, it will cost you more at the pump.
• Insurance — There are a series of factors that can have an impact on your insurance such as age, your driving record, and the type of car you own. Your insurance agent should be able to give you an estimate for any vehicle you’re considering. If you’re in the market for insurance, TruStage has options for you.
• Maintenance — This includes things such as oil changes, tire rotations, and brake service. Maintenance schedules vary by vehicle, so follow your owner’s manual for the right interval. Many newer vehicles go 7,500–10,000 miles between oil changes with full synthetic oil under normal driving. A typical oil change is often around $35–$55 for conventional oil and $65–$125 for full synthetic oil. While brake pads typically need to be replaced after 30,000 to 50,000 miles. If you’re considering an electric vehicle, note that EVs don’t need oil changes, but tires can wear faster and brake service costs vary depending on driving style
• Registration — Registration costs vary by state and county. Visit the SCDMV for current details.

Find Your Car

Remember to set the bar low. When you’re looking for cars, set your maximum price below the amount you think you can afford. Sales tax, fees, insurance, and maintenance can potentially add up to an extra few thousand dollars.

Buying a new or new-to-you car doesn’t have to be a headache. Remember to take into account more than the sticker price of the vehicle and know your budget.  By knowing your budget and what price you can afford, you can save yourself valuable time by only looking at vehicles that you can afford.