Calculating Your Auto Buying Budget: How Much Car Can You Afford?

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Even with poor credit.

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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.


, - April 11, 2019

In order to understand how much car you can afford, you need to take a closer look at your debt to income (DTI) and payment to income (PTI) ratios. These ratios can help you create and stick to a car shopping budget, regardless of how much you make.

Debt to Income Ratio

Your DTI ratio compares your monthly bills to your monthly pre-tax income. This ratio can be calculated easily by hand, calculator, or using online tools. To find the percentage of your income that’s needed for your bills, simply add up all your monthly bills, including your estimated vehicle and insurance payments, and divide this number by your monthly gross (pre-tax) income. The resulting number is your DTI ratio.

For example: Your gross monthly income is $2,500, while your monthly bills come to $900. This gives you a DTI ratio of 36 percent (900 divided by 2,500 equals 0.36, or 36 percent).

Lenders, especially subprime lenders that work with credit-challenged people, like to see a DTI ratio below 50 percent in order to extend a buyer credit. This means the buyer in the example above would meet this requirement. In fact, even if their car payment took up a bit more of their income, they would still be under most lenders' cutoff point.

If your current bills require over half your monthly income, you probably won’t get approved for an auto loan. Believe it or not, lenders don't want to see people stretch themselves too thin just to afford a vehicle.

Payment to Income Ratio

The PTI ratio is designed to tell you how much of your income is needed for a particular payment. Lenders don't like a car loan payment to exceed 15 to 20 percent of your gross monthly income.

Calculating your PTI ratio is a good way to see how much you should be budgeting for an auto loan each month. To find your maximum payment range, simply multiply your pre-tax monthly income by 0.15, and then by 0.20.

For example: If your monthly gross income is $2,500, you would multiply 2,500 by 0.15 and then by 0.20 to find your maximum monthly payment range for a car loan of, in this case, $375 to $500.

Overall Cost of Car Ownership

Now that you know how to calculate the most you should spend each month on an auto loan, there are other things you need to remember about choosing an affordable vehicle.

The overall cost of car ownership should also be on your mind. The costs of gas, insurance, your down payment, and tax, title, and license fees all should be accounted for in your budget.

You can set yourself up for future success by looking at things like fuel economy and safety features and ratings when shopping for a vehicle. Doing so can help you choose a car with a lower overall cost of ownership, so you can be sure you’re getting the most for your money.

If you have excellent credit, chances are you can finance just about any vehicle you can afford, and you don't have to worry too much about getting approved. If you're struggling with poor credit, chances are you're going to need to find a special finance dealership that has second chance lenders who are ready to work with people in your situation.

When You're Ready for Financing

Now that you know how lenders calculate your ability to pay for an auto loan, it should be easier for you to create a budget and stay on track as you plan to buy your next car.

Once you've prepared your budget and are ready to get financed, make sure you're going to the right lender the first time. Don't waste time and energy going all over the place looking for a dealer that can help you, let CarsDirect find the right one for you.

You can use our new and used car pages to research the latest vehicles, and, when you're ready, you can fill out our easy auto loan request form and our team will work to match you with a dealership in your area. The process is free of charge and obligation, so what are you waiting for? Let us take the stress out of car buying!

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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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