How much vehicle you can afford, and how much you should be spending on a car payment depends on your finances, credit situation, and future plans for the vehicle. What one borrower can afford is more than likely to be different from the next person – even on the same car. Knowing how to budget for an auto loan ahead of time can point you in the right direction toward choosing the right vehicle and loan term for your situation.
What is the Average Monthly Car Payment?
According to Experian’s latest State of the Automotive Finance Market report, the first quarter of 2018 recorded record highs for average new and used car loans – and this trend is expected to keep increasing. The average loan amount across all credit score tiers for new vehicles was $31,455, along with $19,536 for used cars. These figures represent a $941 increase for new car loans, and a $410 increase for used car loans from the same time period last year.
Here’s how these auto loan amounts affected payments across credit tiers:
Average used car loan payment across credit tiers:
- Deep subprime (300 to 500): $389
- Subprime (501 to 600): $385
- Nonprime (601 to 660): $372
- Prime (661 to 780): $366
- Super prime (781 to 850): $371
- Total year-by-year difference: $9 increase
Average new car loan payment across credit tiers:
- Deep subprime (300 to 500): $518
- Subprime (501 to 600): $537
- Nonprime (601 to 660): $543
- Prime (661 to 780): $528
- Super prime (781 to 850): $500
- Total year-by-year difference: $15 increase
For car buyers saving up for an auto loan, the increase in average loan amounts and monthly payments could prove to be a problem if they don’t properly plan a budget.
Calculating Your Ideal Monthly Car Payment Amount
Using our car loan calculator, you can get an estimate on just how much you can finance for your next vehicle. But before you start using the calculator, you’ll need to know what your monthly car budget should look like. One of the most common practices used in budgeting for an auto loan is the 20/4/10 rule, which looks like this:
- A down payment of no less than 20 percent of the vehicle’s selling price
- A loan term of no more than four years (48 months)
- A total monthly car expense (including insurance) of 10 percent or less of your pre-tax income
Although the 20/4/10 rule is the ideal, with the average new car price at $35,285 and the average used vehicle price at $19,657, it can be difficult to reach a reasonable monthly payment with a 48-month loan term (the current average auto loan term is approaching 72 months) without a sizeable down payment.
With that in mind, the first thing you need to do is determine your pre-tax monthly income. Once you have that, check with various insurers on the cost of full coverage insurance for the vehicle you’re considering. Then, take 10 percent of your pre-tax income and subtract the monthly insurance premium from it.
For example, let’s say your pre-tax income is $6,300 a month and the cost of insurance for your new car is $100 a month. Multiply your income by 0.1 to get the 10 percent amount, which is $630, then subtract $100, which leaves you with $530 as your target monthly payment.
With a $530 monthly payment, a used car loan would look like this:
- Loan length: 48 months
- Total purchase price (before tax): $21,522
- Interest rate: 5 percent
- Taxes and fees (with 6 percent tax rate and $200.00 worth of fees): $1,491
- Loan amount: $23,014
You’ll have a larger used car pool to choose from with these numbers. But at 48 months, you could purchase a new Volkswagen Golf, GMC Canyon, Chevrolet Malibu, or Chevrolet Colorado – which all start under the $21K price point.
If you want a vehicle that costs more than $21,000 but doesn’t exceed your $530 monthly payment budget, you’ll need to pick a longer loan term. Here’s how different loan terms change the loan amount (vehicle price):
With a 60-month loan term:
- Total purchase price (before tax): $26,306
- Interest rate: 5 percent
- Taxes and fees (with 6 percent tax rate and $200.00 worth of fees): $1,778
- Loan amount: $28,085
With a 72-month loan length:
- Total purchase price (before tax): $30,857
- Interest rate: 5 percent
- Taxes and fees (with 6 percent tax rate and $200.00 worth of fees): $2,051
- Loan amount: $32,909
Remember, these numbers don’t include a down payment. A down payment can lower your monthly payment or give you a bigger budget to work with while increasing your chances of getting approved. While 20 percent down is the suggested amount, you can choose to put down less than 20 percent and still benefit from a down payment.
Using the original example of 48 months and a loan amount of $23,014, here’s how different down payments can affect your monthly payment:
- $1,000 down: $507 monthly payment
- $2,000 down: $484 monthly payment
- $3,000 down: $461 monthly payment
Budgeting Tips for a Car Loan
Once you’ve calculated an estimated monthly payment, the next step is to budget and plan accordingly. Although we use $200 as an example for tax and other fees, the amount you end up paying will differ by state. Here are the costs you need to take into account:
- Sales tax – The sales tax rate differs by state.
- Title and registration fees – Fees to title and register a vehicle vary by state.
- Dealer documentation fee – This varies by state and can range from $75 to over $900
- Average maintenance costs – This varies by vehicle make, model, and age.
- Fuel costs and average distance – This varies by the price of gas and how much driving do you plan to do.
With all of this in mind, it’s best to start planning and budgeting for these expenses as soon as possible.
Start Your Financing Journey Today
Ready to invest in an auto loan, but worry you won’t get approved because of bad credit? Don’t worry! CarsDirect has the resources you need. We work with a nationwide network of dealers that have the lenders available to help car buyers in unique credit situations. Get started by filling out our free auto loan request form!