How Much Should I Spend for a Car?

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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.


, - May 18, 2020

Like many questions about cars, the answer to how much you should spend on one depends on your situation. Something you have to keep in mind, though, is that how much you should spend on a vehicle is a different question than how much car you can afford, especially if you're dealing with poor credit.

Vehicle Spending Rules

When it comes to how much you should spend on a car, everyone seems to have a different answer. Some experts say you shouldn't spend more than 36% of your annual income for your combined monthly bill payments, including a mortgage, vehicle, and insurance. Others say a car purchase can be anywhere from 10% to 35% of your annual income.

Still more borrowers follow the old adage of 20/4/10, which says you should put 20% down on a vehicle, with a four-year (48-month) loan term, and spend no more than 10% of your monthly gross income on your monthly car payment. All of these can be valid methods of coming up with a number for how much you should spend for a vehicle – but can you afford it?

Another thing to keep in mind when you're thinking about how much you should spend on a car is whether or not you're planning on financing. You could save your money and pay cash for something cheap, but if you're sticking to a frugal plan like only spending 10% of your income on a vehicle, you may not be able to get anything very reliable.

Here at CarsDirect, we know that an auto loan is a big deal to bad credit borrowers, and we want to help you get into a vehicle you can afford comfortably. So, let's set aside how much you should spend, and look instead at how to calculate a car loan budget you can afford.

How Much Car Can You Afford?

When you're struggling with credit issues, it's important to build a budget you can stick to when buying a car. Since you're most likely to be working with a subprime lender, you should know that they calculate your auto loan budget based on more than just your income. These bad credit lenders use two calculations in addition to your monthly income.

There are three financial factors lenders consider when deciding if you can afford a car loan:

  • Your income – Subprime lenders typically require that you have a minimum income of $1,500 to $2,000 a month before taxes. The higher your income is, the better your chances of qualifying are.
  • Your debt to income ratio – Your debt to income ratio, or DTI, is the amount of income you're spending on bills each month, including an estimated auto loan and insurance payment, compared to how much you make each month. Most subprime lenders cap your DTI at 45% to 50%, which means that if your current bills take up more than half your monthly income, you're not likely to be approved for financing.
  • Your payment to income ratio – Payment to income ratio, or PTI, is how much of your gross monthly income is being spent on a combined car loan and insurance payment. Lenders that work with poor credit usually cap this at 15% to 20% of your pre-tax monthly income. Even though this is the top of the limit, keep in mind that the lower your PTI, the better.

Calculating your DTI and PTI yourself is a simple process. For DTI, add up all your existing monthly payments and divide it by your pre-tax monthly income. The answer, when converted to a percentage, can tell you how much available income you have.

For PTI, add an estimated auto loan and insurance payment (lenders typically estimate $100 for insurance) together, and divide this by your gross monthly income. The resulting percentage tells you how much of your income is going to be used on those two payments.

CarsDirect Tip: Don't forget that there's more to budgeting for a car loan than just the price of the vehicle. Even though a lender sends a dealer the maximum payment you qualify for, make sure any payment is within your budget. Financing a car comes with a sales tax, as well as title and license fees. Plus, you need to include the cost of fuel and maintenance when you're considering your budget.

Shopping Within Your Budget

Your DTI and PTI are key elements to finding a vehicle you can afford. In order to stay within your budget, you should research vehicles online before heading to a dealership to see which makes and models fit your needs and your budget. You can research both new and used cars right here on CarsDirect.

Then, when the time comes to get your next auto loan, you can start that journey right here. We work with a nationwide network of special finance dealers that are teamed up with the right kind of lenders to help when your credit's less than perfect.

The process is free of charge, and there's never any obligation to buy. Simply fill out our fast and easy car loan request form to get the process started.

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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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