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What Car Can I Afford? Understanding How Big of a Loan You Can Get

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Americans currently owe more than $1.129 trillion in auto loan debt. A record-breaking seven million Americans are also 90 days or more behind on their car payments.

Do you need to take out a car loan? Do you want to avoid being part of the seven million Americans who are months behind on the payments? The key is to choose the right kind of car loan.

If you have questions like “What car can I afford?” or “How much can I borrow for my car?” you’re in the right place. Read on for some great tips that will help you figure out what kind of car loan you can get, as well as how you can find a car that’s affordable for you.

Deciding What You Can Afford

Before you start shopping around and test-driving cars, it’s a good idea to sit down and calculate what kind of car you can afford. This research will save you from falling in love with a vehicle that’s way outside of your price range. Here are some things to consider when making this decision:

Know Your Ideal Car Payment

Start by taking a good look at your monthly expenses and take-home pay. A budget will help you figure out how much money you can allot to buying a new car.


Remember, it’s essential to be realistic about what you can afford when it comes to car payments. Try not to cut things too close, either.

For example, if you only have $400 leftover every month after you’ve finished paying all your bills, this doesn’t mean that you should buy a car that will leave you with a $400 monthly payment. It helps to have some wiggle room in case an emergency arises. That way, you won’t have to dip into another account to make your car payment.

Figure Out How Much You Can Borrow

Once you know what you can afford to pay each month, look into different lenders to see how much money you can borrow for your car. The amount you’re able to borrow depends on various factors, including the following:

  • Your credit score
  • The loan term (how long it’ll take for you to pay back the loan)
  • Whether you buy your car new or used

Many lenders have online calculators available that help you figure out what you’re eligible to borrow. You can even get pre-approved for a specific interest rate based on your credit score and income level before you start shopping. Pre-approval is an excellent option to consider, as it gives you a budget to work with and gives you a bargaining chip when working with a dealer.

Set a Target Purchase Price

With this information in mind, it’ll be much easier for you to set your target purchase price. Remember that there’s more to the cost of the car than the sticker price. You also have to take into account additional expenses, such as taxes, insurance, registration fees, and documentation fees.

Choosing the Right Lender

In addition to selecting the right car, you also need to take care to choose the right lender. Keep the following tips in mind to ensure you’re working with a trustworthy lender that won’t take advantage of you.

Consider Interest Rates

When you’re looking for an auto lender, it’s a good idea to start by considering their interest rates. The specific interest rate you’ll pay depends on a lot of things, such as your credit score, the loan term, the vehicle you purchase, and your income.

Most lenders have a starting interest rate listed on their website to give you some basic information, though. If you get pre-approved, you can also figure out what interest rate you’ll pay if you finance your car through that particular lender.

Keep in mind that you don’t have to stay stuck with one specific interest rate for the duration of the loan. You can refinance your loan later if interest rates go down or your credit score improves. Refinancing can help you get a lower monthly payment.

Research Loan Terms

Pay attention to the loan terms each lender offers, too. Some lenders offer very long loan terms (up to 84 months in some instances).

A longer loan term will give you a lower monthly payment. That’s not always a good thing, though.

Remember, cars depreciate very quickly. This could lead to you owing more on your car than it’s worth and being “upside-down” or “underwater.” You’ll also get a better interest rate if you opt for a shorter loan term.

Find Out if They Do a Soft or Hard Credit Pull

Before you decide to get pre-approved for a loan with a specific lender, check to see what kind of credit pull they do. A soft credit pull will not damage your credit score, but a hard credit pull will.

If you want to avoid your credit score taking a hit, avoid working with a lender that uses a hard pull. At the very least, avoid them until you know for sure that you’re going to borrow from them.

Shop Around

It’s always best to shop around when you’re looking for an auto loan (or any type of loan). Shopping around helps you ensure you’re getting the best interest rates and terms. It can take longer, of course, but isn’t it worth taking a little extra time if you end up spending less money each month on your car payment?

Look Up Potential Restrictions

Some lenders have specific restrictions in place. It’s common for them to only work with certain dealerships and avoid lending money to those who want to buy a car from a private seller.

Some lenders also won’t lend money to those looking to buy specific makes, models, or types of cars. For example, they might avoid lending to those who want to buy an electric vehicle.

Read Reviews

Be sure to look up reviews for a particular lender before you decide to borrow from them. This helps you get a better understanding of how they operate and whether their customers are generally satisfied.

Pay attention to the reasoning behind the reviews. Don’t just look at the star rating and make your decision based on that. Find out what people have to say and, on average, how they feel about a specific lender so you can make the right choice for yourself.

Bonus Tips for Buying a Car

In addition to remembering these tips, there are also some basic car finance and car shopping rules you ought to take into account. They include the following:

Put at Least 20 Percent Down

If possible, try to put down at least 20 percent of the price of the car when you go to purchase it. Putting this amount down will minimize your risk of being underwater on your vehicle, especially if you’re buying it new.

Remember, cars depreciate and lose over 20 percent of their value during the first year after you purchase them. If you put down at least 20 percent, you’ll be able to combat this depreciation. You’ll be less likely to owe a balance to the lender if you sell your car or get in an accident before it’s paid off.

Avoid Loan Terms of Longer Than Four Years

Long loan terms aren’t all they’re cracked up to be. Another way to avoid finding yourself upside down on your car loan is to avoid a loan term that’s longer than four years.

You’ll have higher monthly payments if you take this approach, but you’ll likely owe less interest. This will allow you to pay the car off much faster, too.

Don’t Exceed 10 Percent of Your Gross Income

When you’re figuring out how much you can afford to spend on a car, a good rule of thumb is to avoid buying one that costs more than 10 percent of your gross income.

If you bring home $60,000 per year, for example, avoid buying a car that costs more than $6,000. This includes the price of the vehicle and all the fees and expenses that come with it (taxes, insurance, registration, etc.).

So, What Car Can I Afford?

The idea of taking out a car loan can be pretty intimidating, especially if you’ve never applied for one before. If you keep this information in mind, though, you’ll have an easier time answering the question, “What car can I afford?” and you’ll be less likely to bite off more than you can chew in the loan department.

Do you need help managing your money so you can save up for a car? Do you want to make sure you make all your payments on time and stick to a budget so you don’t end up paying more than you should?

If so, we have plenty of finance-related resources available on our site. Check them out today!

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