How Much Car Payment Can You Really Afford? (3 Simple Rules)

So if you want to know how much car you can really afford without it costing you way too much money, then I've got a simple guide that you can follow in this video. And all you have to do is just plug in your direct numbers and you can find out about how much car you can afford. Now, before I get into everything, I want to quickly mention some statistics regarding car buying, because right now in the United States, I feel like we are buying way too much car compared to how much we're making in terms of a household income. Because the average car loan right now is about $32,000 with an average interest rate of about 6% and an average term length of about 70 months. So when you run the numbers, you're going to get an average payment of about $530 a month. And compared to what we're making, it's kind of expensive because overall the interest that you're going to pay on that particular loan as an average is going to be about $6,200 in interest. And that is a lot of money considering you're just driving something that's always depreciating. So if you want to know how much car you can afford, all you have to do is just follow these three simple steps. And the first one is to put 20% down on the car. Now I know that's kind of a lot of money, but it's important to do here if you're going to do the math right. Because 20% down is not only going to get you the best interest rate, but it's also going to get you the best monthly payment. And you're probably not going to go upside down in the car when you're putting 20% down. Now the next step you need to follow is that your car loan doesn't exceed 60 months. So if you see any loans at a 72 or an 84 month term, don't bother with those because I only want you sticking with a 60 month or less because as far as your affordability goes, that's about the maximum you can handle. You really want to be doing about a 36 or a 48 month loan. But if you have to do a 60 to reach that monthly payment that you want, then I'm okay with that. Because the problem with car loans that are longer than 60 months is that most of the time 72 and 84 month loans also have higher interest rates. So not only are you going to pay more for the car, but you're also taking so long to pay off the car that you are going to end up upside down. Because what's eventually going to happen is you're going to owe more on the car than it's actually worth. And if you ever want to trade it in or sell it at that point, that is a problem because now you have negative equity in the car and that's going to roll over onto the next car you buy and everything is just going to keep getting worse unless you fix it. Now, the last step in determining how much car you can afford is that your car's monthly payment and all the other associated costs don't exceed 10% of your net monthly take-home pay. Meaning the money that you make after taxes, you don't want that to exceed 10% regarding your car and the associated costs with it. So if you make about $5,000 a month after taxes, then technically speaking, your car payment should only be about $400 a month. That way you have another $100 as a buffer for the other expenses that are associated with it because you've still got maintenance, registration, insurance, all of that stuff comes with the car that you own. So you have to add that into the total cost. And obviously the expenses are going to be different for everyone because everybody's in a different situation. Some people drive really far to work and maybe they should include gasoline as an expense and other people don't spend very much on gas and they might not include it. So you've just got to come up with an average of what you think you're really going to be spending on that car and add that on top of the monthly payment and see if it doesn't exceed 10% of your net take-home pay per month. So as a real life example, let's pretend that you go out and buy a $30,000 car and this is including taxes, fees, and everything. And because you do put 20% down on it, you end up financing 24,000 bucks. And then because your credit's pretty good, let's say that you get an interest rate of 3% and then you follow my rule and you get a 60-month loan on the vehicle. Now, based on that math, you're going to end up with a $430 payment. And let's pretend that you do make $5,000 a month after taxes while 430 bucks versus the 500 that's at your 10% is going to be pretty close. So as long as your insurance, maintenance, registration, it's not exceeding too much of that $500 limit, then I would say you can afford that car. And if you're wondering how to do this math yourself, all you have to do is just download what's called a loan calculator. You can find them right on the App Store or you can just Google them right on your desktop. And once you have the loan calculator open, you just put in some basic information, like for instance, how much the loan's going to be, the term length, and the interest rate, and then it will calculate what your monthly payment's going to be and how much interest you're going to pay for the life of the loan. Now, according to this guide, all you have to do is just calculate 20% down, put in a 60-month term or less, and then it will calculate your monthly payment. And based on what your net income is per month, now you can be able to tell how much car you can afford or maybe not afford according to this guide.