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When it’s time to shop for an auto loan, it’s natural to want to know how much you can afford. To calculate, you’ll need several pieces of information:
Your monthly income
The amount of debt you owe and the associated monthly payments
We’ll break this down and include examples in this post. Recommended: Car Loan Terminology
Calculating Your Monthly Income
Determine your gross (pre-tax) monthly income by adding up income from your employment. If you get paid by salary, just divide your annual salary by 12. If you earn an hourly wage, then take your hourly rate and then multiply it by the number of hours you work per week and then by 52 (weeks in a year). Divide that amount by 12. You’re doing this calculation because a lender will perform it to see what funds you have available to pay your monthly debts. Lenders may differ in what other income sources they consider. For example, it could include overtime, commissions, and bonuses; investment income; child support payments; and so forth. If you have a co-borrower or cosigner, include income from both of you.
Determining Your Budget
To use language that a lender might, determine your debt to income ratio: your DTI. To calculate, add up your monthly payments, including your mortgage or rent payment; credit card and personal loan payments; student loan payments; and so forth. To calculate your current DTI, include any current vehicle loan payments. Then, divide this total by your gross monthly income and the resulting percentage is your DTI. If you’re going to sell or trade in your current vehicle, then the payment you’ll include in this calculation will be for your new car (more about that amount soon in this post). Each lender can have its own DTI guidelines or requirements. In general, a DTI below 36% is considered to be good and can help you to receive a lower interest rate; once it goes above 43%, it can be harder to qualify for a loan.
Determining the Initial Loan Amount
At a high level, the initial loan amount is the price of the vehicle minus a down payment (in cash or as a trade-in). Here are definitions of important auto loan terms related to purchasing a vehicle for more information. By putting down a larger down payment, you reduce your loan amount and can also lower your principal and interest payment, which may help you fit the payment into your monthly budget. Besides the size of your down payment, your payment will also be based on two other factors: the interest rate and the loan term.
Calculating Your Interest Rate
Different lenders can charge different interest rates, so it can make sense to investigate what’s being offered. While comparing interest rates, also find out the annual percentage rates (APRs) of each loan program. This rate shows the cost of borrowing money on an annual basis, reflecting the interest rate and fees charged by a lender on an auto loan. With an APR, you can easily compare vehicle loan programs between lenders.Lenders may offer fixed rates, variable ones — or both. With a fixed loan, the interest rate (and, therefore, the principal and interest payments) will remain the same throughout the life of the loan. With a variable rate loan, the rate can increase or decrease according to the parameters of the loan program. Interest rates and payments, then, can fluctuate throughout the loan’s life.
Calculating Your Monthly Car Payment
So, returning to the original question (How much car payment can I afford based on my salary?), you can calculate your monthly car payment to see if it fits within the DTI guidelines of a lender. You can use an online calculator to figure out what your car payment might be. What you’ll need to know:
Price of the car you want to buy
Loan term: how many months or years in the length of the loan
Interest rate
Down payment you’ll put down
Loan amount
When you figure out how much you will put down on the car through a combination of cash and trade in, remember that there will be taxes on the purchase (the amount varies by state) and miscellaneous fees: title and registration fees, for example, and perhaps a dealer’s document fee.
How Much Car Can I Afford Based on My Salary?
Here’s an example. Let’s say that you have a salary of $48,000. This is a monthly gross income of $4,000 ($48,000/12). Now, let’s say that monthly payments are as follows:
Rent: $800
Student loan payment: $300
Credit card payments: $200
Total: $1,300
Because, in this example, you plan to trade in your car when buying a new one, we won’t include that payment here. So, with a monthly gross income of $4,000 and monthly payments of $1,300, the DTI is currently at 32.5%. Now, let’s say that a lender requires a DTI of 36% or less: 36% of $4,000 is $1,440. This only leaves $140 remaining in your monthly budget ($1,440-$1,300) for a car payment. If a lender allows a 40% DTI ($1,600), that means there is $300 in your budget for a car payment. With a DTI of 40% allowable, if you could pay off your credit card balance, then your monthly bills now equal $1,100 — which means there is room for a $500 car payment.
What Happens if You Purchase a Car That You Can’t Afford?
In a worst-case scenario, the lender could repossess the vehicle for non-payment. If someone can’t make their payments, the best thing for that borrower to do is to contact the lender to see if a deferment is possible. This would allow you to skip a couple of payments without penalty. If a short-term answer won’t be enough, then you could sell the vehicle or trade it in for something less expensive.As another possibility, you could consider refinancing a car loan to get a more affordable payment. With a refinance, you’re taking out a new loan to pay off the original one.
Lowering Your Current Car's Monthly Payments
If you can refinance to a lower interest rate, this may allow you to lower the payment, depending on the term. You may be able to get a better rate now simply because you’ve found a better deal or perhaps your credit score is higher now than it was. Another way to get a lower payment is to extend the term of your car loan. This may cause you to pay back more money in interest over the loan’s life, so weigh the pros and cons. If it allows you to make your car payments on time and preserve your credit score, then a longer term may make sense. Here’s information about applying to refinance an auto loan.
Auto Loan Refinancing
If you decide that refinancing a vehicle is a smart move, Lantern by SoFi allows you to receive rates from top lenders selected just for you. Our partners work with an auto refi network to bring offers with great rates directly to your inbox.
Frequently Asked Questions
How much of a car can I afford based on my salary?
How much car can you afford on a $100,000 salary?
How are your monthly auto loan payments determined?
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About the Author
Kelly Boyer Sagert
Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
