Before walking into a dealership or hitting the private party market, it is important that you determine how much you can afford for your car purchase. You shouldn't look to spend more than 20% of your monthly take-home earnings (not your gross income). And this amount should include all of your vehicles, not just the one you are buying now. So, if you have two cars, 10% on each or an amount on each that totals 20%. And even if you have no monthly mortgage or rent obligation, the 20% rule should still be in effect. If you are not happy with your 20% amount, consider cutting back on monthly expenses and create a new budget for yourself.

To determine what your monthly payments will be, you should factor in projected purchase price, term and interest rate of the auto loan and the amount of down payment you expect to leave. Each one of these variables are going to influence how much you will be able to spend on a vehicle. If interest rates are low, you will be able to purchase more automobile to satisfy the 20% monthly payment limit. With low interest rates, it is possible that you can afford a Mercedes. However, with higher interest rates, your 20% cap may only get you an Acura. A good idea would be utilize an auto loan calculator over at You can play around with varying car prices, interest rates, terms and down payments to see what you can expect to pay.

Other variable to consider when determining how much you can afford for your new car purchase
When calculating the amount you are going to be able to afford, you need to take a few additional prices into consideration: auto insurance, gas, repairs, and maintenance are the most common people forget about.

It is important to note that some car types are going to cost more to repair than others. For example. sports cars, luxury vehicles and most foreign models are going to be more expensive for maintenance and repairs than American vehicles and any type of minivan. But, it is also common for the more costly vehicles to include a free maintenance package with their purchases. So, a Mercedes may be more expensive than a Acura, but if the Mercedes comes with a full maintenance contract, the cost of the Mercedes may end up being very close to or even the same as a Acura. You need to analyze all areas where you can potentially save and/or pay more.   And cars that cost more to repair are also going to have more expensive auto insurance associated with them as a result.

Should I leave a down payment? If so, how much?
Your decision on whether or not put a down payment down is going to impact the amount of your monthly payments. With the current state of the economy, it is likely going to be required for you to leave a down payment. Dealers and banks need to see that you are able to afford the car that you are buying.

It is important to understand that the larger your down payment, the more car you are going to be able to afford and below the 20% threshold. This is regarding your monthly payment only. You are still going to be spending more for an asset that is going to continuously decline in worth.

To Summarize...
When determining how much you can afford for your car purchase, the 20% percent model is a good baseline to work with. But, don't forget all the other variables that impact the price of a car, i.e. taxes, depreciation, interest, fuel, repairs and maintenance, etc.. Once you have determine how much you can afford, you should familiarize yourself with our auto loan tips section. Doing so will ensure that you get the best auto loan for your buck!

**There are exceptions to the 20% rule of thumb. For example, if you are a student or graduate that still lives with their parents, since you don't have any housing payments, you may be able to rationalize a larger payment every month. In addition, if your spouse earns significantly more than you, you can simply break this decree.

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