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How much car can I afford? The math before the dealership
Dealers sell the monthly payment. What you should look at is the total cost. Here is how to set a car budget that does not squeeze everything else.
"What monthly payment are you comfortable with?" is the question dealers love to ask. It hides the part that matters: how much the car costs in total.
Look at the total, not the payment
The CFPB auto loan guide recommends comparing the annual percentage rate, the loan term and the total amount you will pay, not just the monthly number.
The same loan over three terms
A $25,000 loan at 7% APR:
- 48 months: about $599 a month and $3,735 in interest.
- 60 months: about $495 a month and $4,702 in interest.
- 72 months: about $426 a month and $5,688 in interest.
The 72-month loan looks $173 cheaper per month but costs almost $2,000 more in interest than 48 months.
A simple budget rule
A common rule of thumb is 20/4/10: at least 20% down, no more than 4 years of financing, and total car costs (payment, insurance, fuel) under roughly 10% of gross income. If the numbers do not fit, look at a cheaper or used car instead of a longer loan.
Before you sign
- Get a loan preapproval from a bank or credit union.
- Negotiate the price of the car first, then the financing.
- Ask for the total amount financed and the total you will pay.
- Say no to add-ons you did not ask for.
- Add insurance and maintenance to your monthly budget.
Frequently asked questions
Is a longer loan better because the payment is lower?
The payment is lower, but you pay more interest overall and may owe more than the car is worth for longer.
Should I get financing at the dealer?
Get a preapproval from a bank or credit union first. It gives you a rate to compare against the dealer's offer.
What is the 20/4/10 rule?
A common rule of thumb: 20% down, a loan of no more than 4 years, and total car costs under about 10% of gross income. It is a guide, not a law.
What costs besides the payment should I count?
Insurance, fuel, maintenance, registration and parking. Together they can add a lot to the monthly cost.