January 1, 2025
Bringing home that new car involves a car loan for most of us. And if you’ve been wondering if you can swing a new car payment, you may need a few pointers on how to accurately estimate car payments and determine what fits your budget before you head out to shop for a new vehicle.
What’s a Car Note You Can Afford?
Since a car is a big financial commitment, one of the most critical decisions is determining how much money you can actually pay each month to sustain a car note. Your car payment should fit comfortably within your budget without jeopardizing your other financial goals and responsibilities. It should also get you a reliable car and reasonable loan terms.
The Rule. Ideally, you should spend no more than 10-15% of your total monthly take-home pay on a car payment. According to this formula, if your take-home pay averages around $3,000 a month, you should try to keep your car payment between $300 and $450. If you bring home $6,000 a month, you might be able to afford a car payment of $600 to $900 per month. According to Edmunds, for the first quarter of 2024, new-vehicle average monthly payments hovered above $730 while the average used-vehicle payment was around $546.
The Reality. That 10-15%, however, needs to fit within your other current monthly expenses like housing, utilities, groceries, savings and discretionary spending. After accounting for these, how much is really left for a car payment without affecting your financial stability? This is an important figure because the costs associated with car ownership go beyond a monthly car payment. You also need to account for insurance, maintenance and repairs, and fuel.
- Car insurance premiums can vary widely based on a car’s features and value, your driving history, your location and the coverage you choose.
- Scheduled maintenance on a new car is often mandatory for maintaining the car’s warranty and is due at established intervals. Repairs may be needed for used cars.
- Fuel costs depend on how much you plan to drive the car—the length of your work commute, for example, or whether you travel frequently.
So, as an overall rule, experts advise keeping a car payment and the associated costs of owning a car under 20% of your take-home monthly pay. This is why getting the monthly payment right is so important, and there are a number of factors to consider in keeping your payment where you need it to be at the terms you want.
How to Keep Your Monthly Car Loan Payment Affordable
One of the first questions a salesperson at a car dealership is likely to ask you is what you’re looking for as a monthly payment. This is an important question because there are a number of factors you and the dealership will have to determine that could affect this figure:
● Down Payment. Any money you can put down up front as a down payment reduces the amount of the loan you have to finance. It may also make you eligible for a more favorable interest rate. Often, a down payment of 20% is ideal for new cars, while 10% is the norm for used cars. However, with car prices still historically high, according to Edmunds, “in the first quarter of 2024, the average down payment on a new automobile was just over 14%.”
● Trade-In. Used cars can retain their value. If you’re buying a new car to replace an older one, you may be able to negotiate a good trade-in value that will reduce the amount of money owed. The dealership will give you credit for the value of your old car toward the car you intend to purchase. To know how much your used car is worth in advance, you can check resources like Kelly Blue Book.
● Interest Rate. How much you pay in interest on your loan affects the monthly payment. The interest rate you’re offered on a loan depends on your credit profile as well as the amount you’re financing. Interest rates are typically a little higher on used cars than they are for new cars. Interest rates also typically increase with the length of the loan’s term. Car dealerships often offer financing when you buy, but they are working through other brokers, so the deal offered may not be as good as one you can get through your own financial lender.
● Extended Term. You may not be able to pay off your car loan in three years, for example, but you may be able to pay it off over a longer term because the payments on principal are stretched over a longer period of time. If you decide for a longer term, however, be aware that longer loan terms usually come with a higher interest rate and more interest paid over the lengthened term. The total interest paid on a loan over 72 months would be at least double what would be paid over 36 months. Longer terms can also be risky if something happens to your car—costly engine or transmission repairs—or you need a new one before you’ve paid off the loan.
● Finance and Insurance (F&I). Car dealerships have their own F&I department to handle car purchases. The F&I representative usually works on commission and finishes the actual purchase contracts and agreements associated with the sale of a vehicle. The F&I department not only offers financing but also sells optional add-on products and features like extended warranties, service contracts and guaranteed asset protection insurance that will increase the total amount of the loan — and the monthly payment.
So, when a salesman asks how much you want your monthly payment to be, your answer needs to be a figure that makes financial sense for you.
Estimate Your Car Payment Online with La Capitol
Doing your due diligence through a trusted lender before you ever enter a car dealership ensures you have a firm grasp on what you can and cannot afford in both a monthly payment and a total loan figure.
For your convenience, we’ve created an easy online La Capitol Auto Loan Calculator. Simply plug in your figures — the highest monthly payment you can afford, any down payment amount, the estimated value of any trade-ins, the term of the loan you want and the interest rate — and our calculator will give you the total amount you can expect to afford for a purchase.
Ready to rev up your search for a new vehicle? Visit our Vehicle Loan Center now to explore your options and begin shopping in confidence for a car that meets your needs—and budget.