How to Determine What Car You Can Afford: A Comprehensive Guide

Published on March 31, 2025 by Casey Yontz, Bankruptcy Attorney

Buying a car is one of the most significant financial decisions many people make. Beyond the sticker price, factors like loan terms, insurance rates, maintenance, and more all impact the actual cost of ownership. This comprehensive guide explores the key considerations that determine what car you can afford. Whether you're a first-time buyer or a seasoned car owner, understanding these factors is critical to making a financially sound decision.

1. Establish a Realistic Budget

The first step in determining car affordability is to assess your monthly budget. Experts often recommend that your monthly car payment (including insurance and other costs) not exceed 10–15% of your disposable income ^[1]. By keeping this figure in mind, you ensure that a new car payment won't cripple other essential parts of your household budget—such as housing, groceries, and savings.

• Assess Income and Expenses: Start by listing all monthly income sources, then subtract recurring expenses like rent, utilities, and food.
• Set Aside Savings: Aim to maintain an emergency fund for unexpected expenses. Purchasing a new vehicle shouldn't deplete your entire safety net.

2. Factor in the Total Cost of Ownership (TCO)

Beyond the purchase price or monthly loan payment, consider the Total Cost of Ownership (TCO). TCO includes expenses like:

• Insurance: Premiums vary widely by state, vehicle type, and personal driving history.
• Fuel Costs: Whether you drive a compact sedan or a large SUV, fuel economy can significantly affect monthly expenses.
• Maintenance and Repairs: Regular oil changes, tire rotations, brake replacements, and unexpected repairs can add up over time ^[2].
• Depreciation: Cars lose value over time. If you plan to trade in or sell your vehicle in a few years, depreciation affects the real cost of ownership.

3. Understand Your Credit Score

Your credit score plays a big role in determining your interest rate and, by extension, your monthly payment. A higher credit score often translates into lower interest rates and more favorable loan terms. This difference can save you thousands of dollars over the life of the loan ^[3]. If your score is on the lower end, consider taking steps to improve it before committing to a car loan, such as:

• Paying down existing debt
• Making timely payments on all credit accounts
• Reviewing your credit report for errors

4. Compare Financing Options

When it comes to financing, one size does not fit all. Banks, credit unions, and dealership financing can each present different interest rates and loan structures. Here are some financing avenues worth exploring:

• Banks and Credit Unions: Credit unions often provide competitive rates for members. Conventional banks may have promotional auto loan rates from time to time.
• Dealership Financing: Convenient but not always the least expensive. Be cautious of dealer markups on interest rates, and always read the terms carefully.
• Online Lenders: Some online platforms specialize in auto loans and can quickly compare rates from multiple lenders for you.

To secure the best deal, get pre-approved for a loan before visiting the dealership. This strategy gives you better leverage to negotiate the car's price, rather than focusing solely on the monthly payment.

5. Loan Terms and Down Payments

Longer loan terms (e.g., 72- or 84-month loans) can reduce your monthly payment but increase the amount of interest you pay over time. A significant down payment will lower your principal, reducing both monthly payments and total interest costs. Aim for a down payment of at least 20% if possible ^[4]. This not only lowers financing costs but also helps prevent negative equity if the car's value drops faster than you pay off the loan.

6. Your Lifestyle and Driving Habits

Assess how you plan to use the vehicle. A commuter car for short trips may prioritize fuel efficiency, while a family car for road trips might require more space and safety features. Think about:

• Mileage: High-mileage drivers might prefer vehicles known for durability and low maintenance costs.
• Safety Ratings: Families often place a premium on cars with top crash-test ratings and advanced safety technology.
• Resale Value: If you frequently switch cars, consider models that hold their value well.

7. Shopping Strategies

Once you have a clear budget and know what features you need, comparison-shopping is vital:

• Use Online Tools: Websites like Edmunds, Kelley Blue Book, and TrueCar help you gauge fair market prices.
• Check Dealer Incentives: Look for promotions such as cashback offers, low APR financing, or discounts on certain models.
• Test Drive Multiple Vehicles: Don't hesitate to try out different cars to see which best suits your comfort and needs.

8. Negotiate Effectively

Negotiation can save you thousands of dollars. Research the market value of the car you're interested in, and come prepared with that information. Focus on the out-the-door price—which includes taxes, fees, and other charges—instead of just the monthly payment. If possible, bring a friend or family member for support and a second opinion.

9. Consider Additional Protections

Optional add-ons, such as extended warranties or gap insurance, can provide financial peace of mind. However, weigh their cost against the likelihood you'll use them. Sometimes, third-party warranties are cheaper and offer similar coverage compared to dealership offers.

In Summary

Determining what car you can afford involves more than just finding a monthly payment that fits your budget. It requires a holistic look at financing options, the Total Cost of Ownership, and your lifestyle needs. By carefully reviewing your credit score, comparing loan terms, and budgeting for ongoing expenses like insurance and maintenance, you can select a car that meets both your financial and practical requirements. In short, the right choice is one you can comfortably pay for over time—while still enjoying the freedom and convenience that come with owning a car.

References

1. Edmunds. How Much Should Your Car Payment Be? Accessed March 31, 2025.
2. AAA. Your Driving Costs. Accessed March 31, 2025.
3. Consumer Financial Protection Bureau (CFPB). Auto Loans. Accessed March 31, 2025.
4. Consumer Reports. Car Buying Guide. Accessed March 31, 2025.