Considerations

Now that you know the upfront and ongoing costs of car ownership, the next step to buying a new or used car is to figure out the price range you can afford. Follow the steps below to get the information you need to determine a target purchase price. Then it’s time to start shopping!

  1. Examine your current budget. Determine the amount you’re able to pay each month for a car payment as well as for insurance, maintenance and gas.
  2. Determine what you can put forward as a down payment. If you’re trading in an old vehicle, include the amount you expect to get in return.
  3. Find out the APR you qualify for. Work with your bank or credit union to get pre-approved to go into the purchase knowing what you can pay.
  4. Decide the length of your loan. The average length of a car loan is three to five years; talk with your lender to see all of the options you can consider.

Budget

If you haven’t tracked your spending in a while, now is a great time to do so. Once you’ve determined how much money you’re spending each month on housing, utilities, groceries and entertainment, look at what you have left over to get an idea of the additional amount you can contribute toward a car payment. Make sure you’re still setting aside some money for savings (if possible) so you can handle any emergencies.

Remember—the car payment is just one cost of owning a car. Make sure you factor in additional costs like gas, car insurance and taxes, which will vary depending on the type of car you select.

Down Payment

A down payment is an initial, upfront payment toward the total cost of something purchased on credit—in this case, a car. Putting money down lowers the amount you’ll need to finance, which in turn, lowers your monthly payments.

Edmunds reports that the average down payment in 2013 was about 12% for a new car and 11.5% for a used car. The amount you put down is dependent upon a few different things. Consider these factors when determining what to put down:

Credit: If you have poor credit, making a substantial down payment may be incredibly important. Borrowers with bad credit often have a hard time getting a loan from a bank or credit union without at least a 15% down payment.

Depreciation: Cars are depreciating assets. As time goes on, they lose their value. Edmunds estimates that new cars depreciate 20% during the first year of use. If you put 5% or less down when you bought the car, you can quickly owe more for the car than what it’s worth due to the rate of depreciation. This is called being “upside-down” on your loan. 

Dealers typically accept cash or personal checks, and some may allow you to put all or part of the down payment on a credit card, although a credit card should only be used if you can afford to pay off the credit card when the bill is due. In addition, if you're trading in a vehicle, you can usually use the value of your trade-in as a down payment.

Interest Rates

To estimate monthly car payments, you need to have an idea of how much you’ll be required to pay in interest (APR) each month. You can get an idea of current rates by taking a look at your bank or credit union’s website, but be aware that the listed rates on these sites are generally their best possible rate—factors like your credit, the length of your loan and whether you buy new or used could increase the rate.

To figure out exactly what APR you’d qualify for, you can always talk to your financial institution before stepping foot in a dealership to get pre-approved. This process will tell you exactly what APR you can expect to pay and the total loan amount you’re approved for.

Loan Term

The average length of a car loan is 36 to 60 months, but it can range anywhere from 12 to more than 72 months. Loan length isn’t just related to how long you have to pay it off; it also impacts your monthly payment amount and interest rate. Shorter loan terms typically come with lower interest rates, so while you may pay more each month, you’ll pay less overall. Longer terms provide lower monthly payments, but you’ll typically end up paying more in interest over the life of the loan.

Consider how loan terms affect a $10,000 loan at 5% interest:

Loan Term Monthly Payment Total Amount Paid Total Interest
12-month loan $856.07 $10,272.84 $272.84
24-month loan $438.71 $10,529.04 $529.04
36-month loan $299.71 $10,789.56 $789.56
48-month loan $230.29 $11,053.92 $1,1053.92
60-month loan $188.71 $11,322.60 $1,322.60

You can see that the 12-month loan has a much higher monthly payment, but you end up paying less for the car overall. The 60-month loan has the lowest monthly payment, but you end up paying over $1,000 more than the 12-month loan.

Figure out how long you want to spend paying off your car. If you have a very low interest rate and don’t anticipate any other big purchases over the next few years, you might not mind spreading out the payments over a longer period of time.  

Calculator

Once you’ve determined your interest rate and identified the ideal loan term for your needs, plug that information into our calculator to see what vehicle purchase price fits within your budget. If you aren’t set on a specific loan term or down payment, try out a few options to see how they affect your buying power.

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