How to Determine? How Much Car You Can Afford in 2024!

Introduction: Understanding the Challenges of Buying a Car in 2024

If you’re in the market to buy a car in 2024, you’re likely facing high interest rates and long wait times. With the current market conditions, it’s essential not to overextend yourself by purchasing a vehicle that’s beyond your financial capacity. The last thing you want is to be “car poor,” a term defined by Urban Dictionary as having such a high car payment that it prevents you from spending on anything else, leaving you stuck eating ramen noodles. Walking into a dealership without a clear budget can lead to impulsive decisions driven by flashy options and price tags.

In this article, I’ll walk you through how to calculate the amount of car you can realistically afford so you can confidently make the right decision. Let’s dive into it.

Car Affordability Calculator

So, how much car can you really afford? A general rule of thumb is to avoid spending more than 35% of your annual income before taxes on a car.

This calculator helps you explore different options by allowing you to adjust key factors like the down payment, interest rate, and loan term. It compares your monthly payment to what’s considered affordable.

Keep in mind, this tool isn’t designed for leasing. If you’re unsure whether to lease or buy, you can check out our detailed guide on the pros and cons of each or try our buy vs lease calculator.

5 Major Factors That Affect Monthly Car Payments

Unless you’re planning to buy your car outright in cash, you’ll likely need financing. Your monthly payments will play a crucial role in your decision-making process. Here are five major factors that influence these payments:

1. Total Loan Amount: The less you borrow, the lower your monthly payments.
2. Interest Rates: Lower interest rates will reduce your payments.
3. Loan Term: A longer loan term may decrease your payments but increase the total interest paid.
4. Down Payment: A higher down payment reduces your loan amount and monthly payments.
5. Credit History: A better credit score increases your chances of getting lower interest rates and more favorable loan terms, ultimately lowering your payments.

When you enter a dealership, knowing these factors will help ensure you don’t get taken advantage of by salespeople who might try to manipulate them to fit your budget.

3 Essential Formulas to Keep in Mind

Financial experts recommend several formulas to help you determine how much car you can afford. Here are three key rules:

1. 35% Rule: Never spend more than 35% of your gross annual income on a car. For example, if your annual income is $70,000, your car purchase should not exceed $24,500.
2. 10/20 Rule: When calculating your monthly car payments, don’t spend more than 10% of your take-home pay on loan payments and 20% on total car expenses (including gas, insurance, maintenance, and repairs).
3. 24/10 Rule: According to this rule, you should make a 20% down payment, take a 4-year loan, and spend no more than 10% of your gross income on car expenses.

With all these guidelines, things can get confusing. Below, I’ll break them down step-by-step in a tutorial to help you calculate how much car you can afford.

Step-by-Step Guide to Calculating Your Car Budget

Let’s go over a practical example where you can use these rules and factors to calculate how much car you can afford.

Step 1: Determine Maximum Car Price

Assume your gross annual income is $70,000. According to the 35% rule, you shouldn’t spend more than $24,500 on a car.

Step 2: Calculate Down Payment and Financing Amount

Using the 24/10 rule, you should aim for a 20% down payment. For a $24,500 car, your down payment would be $4,900, leaving you to finance $19,600.

Step 3: Determine Loan Term

The 24/10 rule recommends a 4-year loan term. For financing of $19,600, this means you’ll need to make annual repayments of $4,900.

Step 4: Calculate Loan Interest and Monthly Payments

Let’s assume a 5% interest rate (though this can vary based on your credit score). With a 4-year loan term, your monthly payment would be $451.

Step 5: Breakdown of Principal and Interest

Your total annual car payments will be around $5,412, with $4,535 going toward the principal and $877 toward interest. Over time, as you pay down the loan, the interest amount decreases.

Step 6: Calculate After-Tax Income

Now, it’s time to determine your after-tax income. For an annual income of $70,000, your after-tax income would be around $53,723, depending on where you live.

Step 7: Estimate Other Car Expenses

Factor in other car expenses such as insurance ($200), gas ($200), maintenance ($100), and miscellaneous ($50), for a total of $550 per month in additional car usage costs.

Step 8: Perform a Sanity Check

Can you afford this car? The rule of thumb is that car payments should not exceed 10–15% of your monthly after-tax income. For this example, 10% of your after-tax income would be around $448, and your calculated monthly payment is $451—slightly over budget. Your total car expenses, including gas and insurance, should not exceed 20%, which amounts to $1,073 in this case. If your car expenses come to $1,101, you’re over by $16.

In this case, you might need to adjust your expectations, either by choosing a cheaper car, increasing your down payment, or securing a lower interest rate.

Final Thoughts

Buying a car is an essential yet significant expense that requires careful consideration. By using the 35%, 10/20, and 24/10 rules and factoring in variables like loan amounts, interest rates, and down payments, you can ensure that you don’t end up “car poor.” It’s essential to differentiate between what you want and what you can afford, so you don’t sacrifice other areas of your financial well-being.

Frequently Asked Questions