How Much Car Can I Afford?: Budgeting for an Auto Loan

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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.


, - June 20, 2018

If you’re trying to find out how much car you can afford, you need to consider the many factors that affect total cost of car ownership, as budgeting for an auto loan means more than just calculating a monthly payment.

Monthly Car Loan Payment

Monthly payments are different for everyone, so keep in mind that your loan payment is affected by things like the interest rate, loan term, and down payment. Lenders, especially subprime lenders for bad credit borrowers, have two calculations they use to see if your finances can support a car and insurance payment. These are your debt to income (DTI) and payment to income (PTI) ratios.

DTI and PTI are simple to calculate yourself, either by hand or using online tools. To calculate your DTI, simply add up all your monthly bills and divide the total by your gross (pre-tax) monthly income. The resulting number is the percentage of your income that’s used for your bills. Lenders like to see your DTI fall below 50 percent.

To find out how much of your income will be used for your combined car and insurance payment, you’ll calculate your PTI. To do this, add together your total estimated car payment and your total monthly insurance payment, and divide that by your gross monthly income. This is the percentage of your income that will be spent on your combined car and insurance payment. This shouldn’t exceed 15 to 20 percent of your monthly income.

If either your DTI or PTI fall outside of a lender’s limits, it could result in them turning down your application for auto financing.

Additional Auto Ownership Costs to Budget For

Just because you squeaked by on the limits for DTI and PTI doesn’t mean you can afford the vehicle you’ve picked out. Your growing family may fit comfortably into a new Chevrolet Suburban, but it won’t do you any good if your car payments are so high that you can’t afford to fill the gas tank.

On top of fuel, you need to budget for car maintenance and repairs, as well as tax, title, license, and dealer documentation fees that aren’t included in the cost of the vehicle. These fees vary by dealer and by state, and we suggest paying them up front along with your down payment. By not rolling them into your loan, you’ll be saving money in interest charges over the loan term.

The Bottom Line

Now that you know the importance of budgeting for your auto loan, you can start to calculate what you can afford. If you’re interested in seeing what an auto loan might look like for you, use our car loan calculator. Once you’ve determined your budget, you can get started looking for a dealership that’s right for you by using our easy online auto loan request form.

At CarsDirect, we work with a nationwide network of special finance dealers that have the lenders available to work with people who have bad credit, no credit, or even bankruptcy. Our service is free of charge and obligation, and we’ll match you with a dealer in your area. What are you waiting for? Get started 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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