Calculating a Car Payment You Can Afford

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - September 7, 2018

When something changes with your finances, it’s important to know how your monthly bills fit into your new budget. This is especially true when it comes to big ticket items like your car loan payments.

How Much Car Can You Afford?

You need to know how to calculate a budget that allows you to see exactly what you should be spending on major purchases, like a vehicle. This can be especially true when you’re struggling with credit issues. If this is the case, you’ll need to find a special finance dealer in order to get the financing necessary for a car loan. These dealers typically work with subprime lenders that have the ability to look beyond credit scores to approve borrowers for an auto loan.

One of the things these auto lenders do to see if you qualify for financing is to “debt you out”. This means they calculate both your debt to income (DTI) ratio and payment to income (PTI) ratio. DTI shows a lender how much of your income is being spent on bills, while PTI shows lenders the percentage of your income that goes toward a specific payment. These calculations are simple, and you can do them yourself to make sure you’re staying on budget.

Calculating Your Monthly Car Payment Range

To calculate how much of a car loan payment you can afford, use your PTI ratio to determine a reasonable monthly payment range. Lenders like to see your combined car and insurance payments taking up no more than 15 to 20 percent of your gross monthly income. To find out your payment range, simply multiply your pre-tax monthly income by 0.15, and then repeat the calculation multiplying by 0.20.

For example: Let’s say your pre-tax monthly income is $2,598 a month ($15 per hour, 40 hours per week). You could afford to spend between $398.70 and $519.60 a month on your combined car loan and insurance payments.

Don’t get too caught up on the monthly payment amount, however – especially if you have poor credit. It’s important to step back and look at the big picture when it comes to affording a car loan. If you stretch out a loan term just to fit a monthly payment into your budget, you could be hurting yourself in the long run, especially if your finances change.

Budgeting for the Big Picture

When you’re thinking about an auto loan, you need to consider the overall costs. A low monthly payment on a vehicle with a long loan term ultimately ends up costing you more due to increased interest charges. Another thing to consider is that cars need gas, regular maintenance, registration, and insurance – all of which can add up quickly.

In order to make sure you have enough available income to pay for those things and still keep up with your bills you should calculate your DTI. This is done by adding up all your bills – including car and insurance payments – and dividing the total by your gross monthly income. The resulting decimal can then be converted into a percentage. Lender requirements vary, but they typically prefer your DTI to not top 45 to 50 percent in order to approve you for a loan.

For example: If your monthly bills total $1,052, divide that by your pre-tax monthly income of $2,598, which gives you 0.40, or 40 percent. This calculation shows your current obligations take up less than half your monthly income, although this should include both a car and insurance payments.

Knowing how to calculate your DTI and PTI helps you ensure that you can afford an auto loan. But just how much vehicle you can get approved for is going to vary by lender. To get an estimate of what you might be able to qualify for you can use online tools such as our car loan calculator.

Let Us Help You Find a Car Loan with Bad Credit

As you can see, budgeting for both your monthly payment and the overall cost of a vehicle is important, but there are other factors involved as well. Things like credit score, credit history, income, employment, and residency can all play a role in your chances for approval. But when you know where to go to find the right lenders these factors don’t have to be overwhelming.

Here at CarsDirect we work with special finance dealers that have the lenders you’ve been looking for. It’s fast, free, and there’s never any obligation when you fill out our online auto loan request form. Get started right now and we’ll get to work matching you with a local dealer today!

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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