How Much Should My Car Payment Be?
Written by
Sarah Sharkey
Edited by
Melanie Grafil
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When deciding how much your car payment should be, many factors, like your income and other expenses, come into play. While you want a safe and reliable ride, you don’t want to overextend yourself and put your overall financial health at risk for the sake of an expensive vehicle.
This guide explores the question of how much your car payment will be.
How Much Should Your Car Payment Be?
Everyone has a unique financial situation. However, it’s generally recommended that drivers spend no more than 10% of their monthly take-home pay on car financing.
Beyond the car payment itself, experts recommend that your total car ownership costs consume less than 15% to 20% of your budget. Below are some of the many car-related expenses to factor in:
Car Insurance
It’s illegal to drive without a minimum amount of car insurance in most states. If you are financing your vehicle, the lender will likely require you to carry comprehensive and collision coverage on top of your liability insurance, which could lead to hefty insurance bills.
Gas
If you want to get around, you’ll likely need to fuel your car by topping off your gas tank. But even if your vehicle isn’t gas-powered, you’ll have to pay for the necessary fuel, like a charging station.
Maintenance
Vehicles tend to come with maintenance costs, which can add up quickly. A few ongoing maintenance costs to consider include oil changes, tire rotations, new tires every couple of years and windshield wiper replacements.
Registration and Taxes
It’s often illegal to drive without paying for your vehicle’s registration and any vehicle taxes levied by your state or local government.
Emergency Repairs
In addition to ongoing maintenance, car owners tend to run into emergency repairs. Consider setting aside $50 to $100 per month to cover unexpected car repairs as they pop up.
As you can see, the costs related to a vehicle go far beyond the car payment. Take all of these costs into account when determining how much you can afford to spend on a car payment.
Car Payment Affordability Rules
As with most areas of personal finance, you can follow some general affordability guidelines when choosing your car. Below is a look at some of the most common strategies.
The 20/4/10 Rule
The 20/4/10 rule outlines the following guidelines for an affordable car purchase:
- 20% down payment: You should aim to put 20% down when you purchase your vehicle.
- 4-year repayment term: You should choose a repayment term of four years or less on your auto loan, which works out to a maximum of 48 months.
- 10% transportation costs: You should aim to spend less than 10% of your gross monthly income on transportation costs.
The goal of these guidelines is to ensure you don’t overspend on the purchase of a depreciating asset. If you stick within these parameters, you are less likely to have buyer’s remorse when driving off the lot with a car payment.
20/40/10 Examples
Here are a few different scenarios to give you an idea of how much you might be able to afford for a vehicle purchase using this rule of thumb.
- A person making $50,000 in gross income per year could potentially afford a $300 monthly car payment with a $5,000 down payment. That still leaves over $100 per month in their budget to cover other car-related expenses and stay within the 20/4/10 rule’s guidelines.
- A person making $75,000 in gross income per year could potentially afford a $500 monthly car payment with a $6,000 down payment. That still leaves around $125 per month in their budget to cover other car-related expenses and stay within the 20/4/10 rule’s guidelines.
- A person making $100,000 in gross income per year could potentially afford a $730 monthly car payment with an $8,000 down payment. That still leaves around $100 per month in their budget to cover other car-related expenses and stay within the 20/4/10 rule’s guidelines.
Remember, this is strictly a rule of thumb. It’s important to run the numbers for your unique situation before committing to a car payment. In some cases, you might not be able to spend quite as much as you had hoped on a car payment.
Alternative Budgeting Approaches
When determining how much your car payment should be, it’s important to consider not just your monthly income but also your overall financial situation. If you have other major financial obligations, locking in a low car payment might be a top consideration. But if you have more financial bandwidth, you might choose to take on a slightly bigger car payment, possibly to pay off your vehicle purchase faster.
Here are some potential factors that might impact how much you can afford for a car payment.
If You Have Large Debts
If you already carry significant debts not related to a vehicle, the amount you can afford to spend on a car may be lower than the recommended guidelines.
Extreme Financial Goals
For individuals with lofty financial plans, like early retirement or paying off a massive amount of debt early, taking on a large car payment would potentially derail those goals. You’ll need to weigh the value of your future financial dreams against the possibly limiting car payment.
Loan Terms
The length of your car loan directly impacts your car payment amount. A longer loan term tends to lead to lower monthly payments. But you’ll be stuck with the payment for longer. With that, it’s important to consider the vehicle’s price in addition to the monthly payment to determine if the sticker price is something that fits into your financial plans.
Interest Rates
If you are shopping for a vehicle during a period of high interest rates, that could cut into your purchase price budget. For shoppers in a low-interest rate environment, you might be able to get more vehicle bang for your buck.
The factors above are a few of the ways your ability to afford a particular car payment might change. But if you don’t have extenuating circumstances, the 20/4/10 rule offers a guideline for how much of a car payment you can afford.
If you opt for a car payment larger than 10% of your income, consider keeping your total debt payments under 36% of your gross income. When your debt payments total more than 36% of your income, it’s generally more difficult to make ends meet due to the financial strain of your monthly debt obligations.
How Loan Terms Impact Your Monthly Car Payment
If the loan terms initially offered don’t fit your budget, it’s important to negotiate or shop around with different lenders.
- Longer loan terms can lower monthly payments but result in higher overall costs due to interest.
- A shorter loan term means higher monthly payments, but less interest paid overall.
If you’re already in a loan with unfavorable terms, consider refinancing options to get a better rate or a more comfortable term length.
Car Loan Terms and Monthly Payments
When it comes to financing, the loan term and interest rate have the biggest impact on your monthly payment. Generally, a lower interest rate leads to a lower monthly payment. Likewise, a longer loan term leads to a lower monthly payment.
The table below outlines some examples of varying loan terms and interest rates for a $25,000 car loan.
| Loan Term | Interest Rate | Loan Amount | Estimated Monthly Payment | Total Interest Paid |
|---|---|---|---|---|
| 36 months | 6.00% | $25,000 | ~$760 | ~$2,350 |
| 48 months | 6.50% | $25,000 | ~$595 | ~$3,550 |
| 60 months | 7.00% | $25,000 | ~$495 | ~$4,700 |
| 72 months | 7.50% | $25,000 | ~$430 | ~$6,000 |
| 84 months | 8.00% | $25,000 | ~$391 | ~$7,844 |
Takeaway
Finding and working with a financial advisor is a great idea. A financial advisor will help keep track of your finances and assist you in attaining your financial goals. While finding the right one can be overwhelming, you can decide to work with a financial advisor in your community or a virtual one.
FAQs: How Much Should Your Car Payment Be?
Here are answers to some of the most frequently asked questions about car payments.- How much of your income should your car payment be?
- If possible, keep your total car costs — including the car payment — to less than 10% of your monthly income. This includes total car expenses, like gas and insurance. However, the more affordable the payment is for your budget, the better.
- How does my credit score affect my car loan rate?
- In general, borrowers with a higher credit score enjoy lower interest rates. On the flip side, borrowers with lower credit scores tend to face higher interest rates.
- Is leasing a car a better option for affordability?
- Once you pay off a car loan, you can drive the vehicle debt-free for as long as you need to. With leasing, though, you'll need to begin a new lease when your current lease ends. That said, leasing tends to be more costly in the long term. Leasing might come with lower payments in the short term, though.
- What happens if my car payment is too high?
- If you are stuck with a car payment that's too high for your monthly budget, look into refinancing. In some cases, you can refinance into a loan with a longer term or lower interest rate to lock in a more affordable monthly payment. If refinancing isn't an option, consider selling the car and opting for something more affordable.
Elizabeth Constantineau contributed to the reporting for this article.
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- Time. 2024. "How Much Should My Car Payment Be?"
- Experian. 2023. "The Automotive Finance Market Shows Signs of Optimism in Q3 2023."
