Looking for a Used Car? Here’s How to Determine an Affordable Monthly Car Payment

October 14th, 2022 by

Aerial view of a white 2022 Hyundai Veloster N on a desert road

It’s time to upgrade your vehicle, which prompted your search for the best budget used cars in Durham. However, that search has left you with more questions and confusion, especially regarding your budget and what you can spend on your next vehicle. How much car you can afford monthly depends on your income and expenses, but how you calculate this depends on who you ask. This discrepancy creates even more confusion, especially when trying to save money for your purchase. You can typically save money to buy a used car by taking a look at your income and determining how much money is available to save after factoring your monthly bills.

We’re here to shed light on these questions by showing you a few methods to determine how much car you can afford, specifically how much you can afford to spend each month on a car payment, routine maintenance, and fuel. From there, we’ll show you some great ways to save money for your purchase that can lower your overall purchase price and make your monthly payments more affordable. Are you ready?

It’s All in the Numbers

One of the most confusing aspects of buying a vehicle is knowing how much you can afford to spend. Unfortunately, there’s no straightforward answer because experts have different opinions, which muddies the waters when it’s time to crunch numbers. So, how can you be sure that you’re not overspending? Here are three methods that lay the foundation for building your budget and investing in a car you can afford.

The 50% Rule

Some experts follow the 50% rule, suggesting that an individual can afford a vehicle that costs roughly half or 50% of their annual take-home pay. In a practical scenario, someone that brings home $80,000 annually after taxes could afford a $40,000 vehicle. However, this method can be financially risky since it encourages individuals to spend more without calculating the risk of job loss or other financial emergencies.

The 20% Rule

Other experts encourage individuals to calculate how much car they can afford based on the 20% rule. In this case, your automotive expenses should not be more than 20% of your monthly income before taxes. So, if you earn $4,000 before taxes each month, your monthly automotive expenses should not exceed $800. These expenses include your loan or lease payment, fuel costs, and maintenance or repairs.

The 10% to 15% Rule

Financial experts tend to fall more on the conservative side, encouraging buyers to follow the 10% to 15% rule. This approach means your new car payment should not exceed 15% of your monthly paycheck. So, for example, based on a $4,000 monthly income, your automotive expenses shouldn’t exceed $600 on the high end or $400 on the low end.

Close-up of someone doing budgeting paperwork at a dealership.

The Middle-Of-The-Road Approach: Determining Your Budget

The methods listed above run the gamut from encouraging you to spend more to leaning on the side of caution. Ideally, we encourage our customers to adopt a middle-of-the-road approach that allows them to invest in a vehicle that will serve them without spending their entire budget. In other words, we don’t recommend spending 50% of your annual income or limiting your options to 10% of your monthly paycheck. Instead, we recommend setting a budget where, ideally, you’re spending around 15% to 20% on your vehicle.

Income vs. Expenses

Calculating your budget begins with comparing your monthly income to your expenses. These expenses include mortgage and rent payments, groceries, utilities, childcare, entertainment, etc. You’ll also want to include any money you move into savings or your emergency fund each month. Once you deduct your expenses from your income, you know how much money you have remaining that you can spend on a used car.

Automotive Costs

As you determine how much you can afford to spend on a vehicle, remember that this figure needs to include more than a loan or lease payment. You’ll also need to include fuel, insurance, and repair expenses. To better estimate how much you might spend on fuel, look at your current fuel expenses and average fuel economy. Then, you can compare these figures to the model you intend to purchase using the EPA’s database to estimate annual fuel costs.

Advantages of Buying Used

When considering these factors, there’s a significant advantage to buying a used vehicle rather than a newer model. Investing in a used car lets you avoid the rapid depreciation or loss in value of a new vehicle, meaning you pay closer to its actual value. Your money also goes further on the used lot and can get you behind the wheel of a better-equipped model. Additionally, insurance for used models is typically cheaper, which puts less financial strain on your monthly budget.

Close up of a pile of hundred dollar bills

Saving Money: Making the Most of Your Purchase

One of the best tips for buying a used vehicle is to let your money do the work for you. What do we mean? Saving money and applying those savings toward your purchase is a fantastic way to lower your monthly loan payments and get a better-equipped model. But how do you save money for a car? It all starts by looking at your expenses.

Be Mindful of Your Spending

As you determine your budget, look at your monthly expenses and ways to save. For example, are you spending more than necessary at restaurants when you could eat at home? Are there any subscriptions or streaming services you don’t use and could cancel? Remember, every penny adds up and can significantly impact what type of vehicle you can afford.

Keep Savings Out of Reach

As you start cutting expenses, you’ll likely have more money left over each month. While keeping that money in your checking account is alright, you might find that making it less accessible is far more productive. By setting up a savings account, you eliminate any potential to overspend and can set yourself up for success as you watch your savings grow.

Value Your Trade

Don’t forget that your current vehicle is also critical to your next vehicle purchase. Take the time to deep clean your car or have it professionally detailed so that it makes a great first impression. Then, use tools like Kelley Blue Book to determine your car’s value, so you know what to expect when it’s time to sell or trade. From there, you can negotiate a fair price that puts more money in your wallet that you can use toward your next purchase.

Consider Your Must-Haves vs. Your Needs

As you save money for your next vehicle, consider your must-haves and compare that list with your wants and needs. For example, advanced safety and security features might be non-negotiable, while a premium sound system is an added perk but not a necessity. By outlining these must-haves or non-negotiables, you can narrow your search, finetuning your choices to base or mid-tier trims or older models with fewer features at a lower price.

It’s All About the Bottom Dollar

How much you can afford to spend on a car depends on who you ask and your budget. It seems like a no-brainer, but taking a deep dive into the different methods proves that many people have differing opinions. For example, while some say spending 50% of your annual income on a vehicle is acceptable, others are more conservative. So, how do you know the best method for your needs?

It comes down to the bottom dollar. Looking at your monthly income and expenses paints a clearer picture of where your money goes and areas where you can save. By doing your homework, you can determine if spending 20% of your monthly income will set you up for success or if you need to err on the more conservative side and budget your automotive expenses around 10%. In either instance, we encourage you to over budget, calculating your expenses higher, so you have plenty of cushioning when or if the unthinkable occurs.