In order to understand just how much car you can afford, you need to take a closer look at your income and know some basic budgeting tips. These tips, such as the the 1/10 car buying rule or the 20/4/10 rule, can help you create and stick to a car shopping budget, regardless of your salary. But, there’s another rule that can come in handy as well: the 50 percent salary rule.
The 50% Salary Rule
Using the 50 percent salary rule, you can buy as much car by salary as whatever half your annual gross (pre-tax) income is. So, if you make $50,000 a year, you should never buy a vehicle that costs $25,000 or more.
This rule accounts for all costs involved with owning a car. You’re going to want to make sure you’re spending less than the allotted $25,000 or you’re going to regret it when you realize you forgot to budget for auto insurance, fuel, and maintenance.
One thing that makes the 50 percent salary rule unique is that it can, and should, cover all vehicles in your household. This means if the combined income for your family of four is $110,000, then no more than $55,000 should be spent on all the cars driven, including by you, your spouse, and even your 16-year-old.
Not only is this guideline wise, but it follows typical lender protocol, as well. As a general rule of financing, lenders calculate the probability of your being able to successfully complete an auto loan by taking into account all your monthly expenses. If your payment obligations already take up half your income, it’s not likely you’re getting approved for a car loan.
Overall Cost of Car Ownership
No matter your credit score or your salary, there are several things you should keep in mind as you're shopping for a vehicle. Remember, things like tax, title, and license fees, down payment amount, insurance costs, and the price of gas all factor into the overall costs of a car owner. This is why it's a good idea to look at things like fuel economy, safety ratings, and average resale values as you're shopping for a vehicle.
If you have excellent credit – and an excellent salary to match – chances are you can get just about any car you want, and you don't have to worry too much about loan approval or affordability.
But, if you're struggling with poor credit, or only have a $25,000 salary, chances are you're going to need to go to a special finance dealership that has lenders that can work with people in these situations.
If this is the case, keep in mind that you may have a more limited vehicle selection due to the constraints of car shopping by salary. It's important to be flexible and know that now isn't the time to finance your dream vehicle.
When You're Ready for Auto Financing
Once you've prepared your budget and are ready to get financed, make sure you're going to the right lender the first time around. Rather than going all over the city looking for a dealer that works with the right lenders, start with CarsDirect instead.
You can use our new and used car pages to research vehicles and when you're ready, fill out our simple auto loan request form and we'll get you matched with a local 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!