How Much Car Can I Afford?

            Car Affordability = (Monthly Budget / ((1 - (1 + Monthly Interest Rate)^(-Loan Term)) / Monthly Interest Rate))
        

Concepts

Determining how much car you can afford is important for making a sound financial decision. There are a number of factors to consider, including your income, expenses, debt, and credit score.

Formulae

There is no one-size-fits-all answer to the question of how much car you can afford. However, there are a few simple formulae that can help you get started:

• 25/36 rule: The 25/36 rule states that your monthly car payment should not exceed 25% of your monthly after-tax income and your total monthly transportation costs (including car payment, insurance, gas, and maintenance) should not exceed 36% of your monthly after-tax income.
• 20/4/10 rule: The 20/4/10 rule states that your down payment should be at least 20% of the purchase price, your loan term should be no more than 4 years, and your monthly car payment should be no more than 10% of your monthly net income.

Benefits

There are several benefits to determining how much car you can afford before you start shopping:

• It can help you to budget for your car purchase.
• It can help you to avoid overspending on a car.
• It can help you to qualify for a loan with a good interest rate.
• It can help you to avoid financial problems in the future.

Interesting Facts

• The average monthly car payment in the United States is $728.
• The average American household spends 18% of its income on transportation.
• The average American has a car loan balance of $19,273.
• The average American keeps their car for 11.9 years.

Scholarly References

• Financial Mathematics: An Introduction by Irvin H. Siegel and John W. Van Horne (2013)
• Investments by Zvi Bodie, Alex Kane, and Alan J. Millerron (2018)
• Corporate Finance by Richard Brealey, Stewart Myers, and Frank Allen (2016)

How to Calculate How Much Car You Can Afford

There are a few steps involved in calculating how much car you can afford:

1. Calculate your monthly after-tax income. This is the amount of money you have left over after taxes are taken out of your paycheck.
2. Calculate your monthly debt payments. This includes your credit card payments, student loan payments, and any other monthly debt payments.
3. Calculate your monthly transportation costs. This includes your car payment, insurance, gas, and maintenance.
4. Use the 25/36 rule or the 20/4/10 rule to determine how much car you can afford.

Tips for Determining How Much Car You Can Afford

Here are a few tips for determining how much car you can afford:

• Be honest with yourself about your budget. Don’t overspend on a car that you can’t afford.
• Consider your future financial goals. If you’re planning on saving for a down payment on a house or retirement, you’ll need to budget accordingly.
• Don’t forget to factor in the cost of insurance, gas, and maintenance. These costs can add up quickly.
• Get pre-approved for a loan before you start shopping. This will give you an idea of how much you can afford to borrow and what your monthly payments will be.

Conclusion

Determining how much car you can afford is an important step in the car buying process. By following the tips above, you can make a sound financial decision that you won’t regret later.