Several lenders may approve an auto loan for you, especially if you have high credit scores and a steady employment history. Nonetheless, you shouldn't rely on a lender to determine how much you can afford to spend on a vehicle. You should compare costs associated with owning a car with your monthly income to avoid paying more than you can afford for a vehicle.
Monthly Income
The purchase price of any vehicle you buy should consume no more than 20 percent of your monthly income after taxes, according to Bankrate.com. Your after-tax income is your actual take-home pay, not your annual salary. Remember that cars usually aren't good investments for people who buy them for everyday transportation. Vehicles generally begin to lose value from the first day consumers buy them. Therefore, tie up as little of your income as possible for monthly car payments.
Monthly Payments
Consider things such as the purchase price, the interest rate on an auto loan and your down payment to determine if you would spend more than 20 percent of your monthly income to buy a vehicle. You could keep your monthly loan payments at 20 percent or less by increasing the amount of your down payment. However, Bankrate.com notes you would likely spend more than you should with a larger down payment, because you've used more of your income to lower your monthly payments to the 20 percent mark. Extending the amount of time you have to repay an auto loan also could lower your monthly payments, but then you would pay more in interest charges over the life of the loan.
Calculating Affordability
Online calculators offered by Bankrate.com, MSN Autos and other financial websites can help you estimate the type of deal you need to make to keep your car payments near 20 percent of your monthly income. For example, someone who brings home $1,500 per month could pay up to $300 per month in car payments. The MSN vehicle affordability calculator indicates that someone who can make a $2,000 down payment and a $300 monthly car payment could buy a vehicle that costs about $17,500 with a five-year loan and a 6 percent interest rate. However, the calculator doesn't include other costs, such as taxes and dealership fees.
Considerations
Auto insurance is one of the biggest expenses that increases the cost of owning a vehicle. Contact your insurer before you buy a car to get an estimate on how much it will cost to insure the vehicle you want. Determine what you can do to keep your insurance costs down. For example, it costs more to insure luxury vehicles and sports cars than a no-frills family sedan or minivan.
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