How Much Car Can I Afford?

A shiny new vehicle can be tempting, but without a plan, it’s easy to overspend. In this article, we’ll walk through the key steps to determine how much car you can afford—including budgeting for financing and ownership costs—to help you make a smart financial decision.

Your Car Budget: Determining What You Can Afford

A car is often your biggest expense after housing, and ownership costs go beyond the monthly payment. Expenses like fuel, insurance, maintenance, and fees can quickly add up. You should try to keep total transportation costs within 10-15% of your take-home pay. Let’s break down the steps to calculate a realistic budget for your next vehicle.

1. Work Out Your Total Car Budget

Your car budget includes all monthly costs associated with ownership, not just the loan payment. To calculate how much you can afford:

Find your monthly take-home pay. If your income varies, use the average from the last 6–12 months.
Deduct fixed expenses like rent/mortgage, utilities, insurance, and subscriptions.
Subtract variable costs such as groceries, healthcare, childcare, and entertainment.
Account for debt payments, including student loans, credit cards, and other obligations.
Factor in savings contributions for retirement, emergency funds, and education.

The remaining amount is what you can allocate toward a car—covering loan payments, insurance, fuel, maintenance, and repairs.

2. Calculate Your Maximum Car Payment

Once you know your total car budget, determine how much you can allocate to loan payments by estimating other ownership costs:

Insurance: Get quotes for different vehicle types and mileage estimates.
Fuel: Research fuel efficiency for the type of car you’re considering (e.g., sedan, SUV, hatchback).
Maintenance: Check repair costs with a mechanic, friends, or resources like Kelley Blue Book.
Fees: Look up registration costs, tolls, and typical parking expenses in your area.

Subtract these costs from your total car budget. The remaining amount is the maximum you can afford for monthly car payments.

3. Determine Your Maximum Car Purchase Price

Now that you know your maximum monthly payment, the next step is to estimate how much car you can afford. This depends on factors like:

Loan term: A longer term lowers your monthly payment but increases the total interest paid.
Interest rate: Rates vary by lender and credit score, affecting affordability.
Total budget: Your monthly payment should fit within the amount you’ve set aside for car costs.

Once you factor in these details, you’ll have a realistic price range to shop within.

4. Estimate Your Loan Amount

Your loan amount will be more than the car’s sticker price due to added costs like:

Sales tax and registration fees
Dealer processing fees
Optional add-ons, warranties, or GAP insurance

However, factors like your down payment and trade-in value can reduce the total amount you need to borrow.

To get a complete picture, Homebase’s car loan calculator is a handy tool that simplifies the process. It helps you factor in taxes, fees, and incentives while letting you adjust loan terms, interest rates, and down payments. By exploring different financing scenarios, you can confidently find a loan that fits your budget and long-term financial goals.

Making Smart Decisions for Your Car Purchase

With a clear understanding of your budget, it’s time to weigh your options carefully. A little flexibility can make a big difference.

Improving Your Odds

It may be tempting to jump into a purchase, but remember that a sustainable budget is key. Consider these strategies to improve your chances of affordability:

Save for a Larger Down Payment: The more you can put down, the less you’ll need to finance. Many people follow the '20/4/10' rule: aim for a 20% down payment, a loan term of no more than four years, and keep transportation costs under 10% of your budget.
Boost Your Credit Score: A higher credit score can help lower your interest rates. Paying down debt and ensuring timely bill payments can improve your score over time, making financing more affordable.

New vs. Used

Choosing a used car can help you get more value for your money. New cars depreciate quickly, so buying a lightly used model can balance affordability with reliability. Plus, you might qualify for a better financing rate if you’re buying a used car.

Lease vs. Own

Leasing can provide lower monthly payments, but remember, you won’t own the car at the end of the lease term. Owning your car means building equity, while leasing may be a better option if you prefer to drive a new car every few years.

Choosing Your Financing Option

When it comes to financing, credit unions offer distinct advantages over traditional banks or dealerships:

Credit Union Benefits: As not-for-profit organizations, credit unions like Homebase offer lower interest rates and personalized service. This can lead to significant savings over the life of your loan.
Dealer Financing: While it may seem convenient, financing through a dealership often results in higher rates and less favorable loan terms due to added fees and financing charges.

Homebase Credit Union’s Financing Options

At Homebase Credit Union, we understand the importance of making car ownership affordable. That’s why we offer competitive rates and flexible terms, including: