How Much Car Can I Afford? Edmunds Car Affordability Calculator

Fitting a car into your household budget is no easy task, and financial experts do not agree on how to determine its affordability. One school of thought holds that all your automotive expenses — gas, insurance, car payments — should not exceed 20% of your pretax monthly income. Other experts say that a vehicle that costs roughly half of your annual take-home pay will be affordable. Then some frugal personal-finance gurus say you should spend no more than 10%-15% of your annual income on a vehicle purchase. Pretax, post-tax, annual income; these terms are enough to make a person ask: "How much car can I afford?"

There's no perfect formula for how much you can afford, but our short answer is that your new-car payment should be no more than 15% of your monthly take-home pay. If you're leasing or buying used, it should be no more than 10%. The reason for finding a vehicle that falls below 10%-15% is that the payment isn't the totality of what you will be spending. You'll need to factor in the costs of fuel and insurance, and many people overlook that. We put those costs at another 7% of your take-home pay. So, all in, you're looking at a total budget that is ideally, no more than 20% of your monthly take-home pay.

While the 10%-15% rule may not work for everyone, it's a good starting point for finding a target price that won't leave you scrambling to pay your bills every month. Here's how you can get a more customized number for yourself.

Take a few minutes to run down what you spend every month. From your monthly take-home pay, deduct rent or mortgage, bills, groceries, child expenses, savings, and spending on entertainment. You will then discover how much car you can afford.

Not sure what kind of vehicles can you buy with this monthly payment (or less)? Take a look at the Edmunds affordability calculator, which lists vehicles that fall into the price range you've predetermined. Keep in mind that the prices on the calculator results page will change based on the trim level, options, sales tax and registration fees, etc.

Does it seem like you might not be able to afford the purchase? We know that feeling. New vehicles have gotten more expensive over the years and our salaries haven't kept up. In any case, this amount now represents your automotive budget, which, as we've noted, is more than just the monthly payment. On to estimating fuel costs and insurance fees.

Before you set out to buy or lease, find out what your fuel expenses will be and what it will cost to insure the vehicle. Both costs vary considerably based on your location, your driving history and the vehicle you've chosen. Even though it takes a little work to come up with these estimates, you shouldn't overlook them. Knowing these costs can help you choose among multiple vehicles. Some may cost more to fuel up; others might have a higher cost to insure.

The EPA's Fueleconomy.gov website has a detailed listing of fuel economy figures as well as annual fuel cost estimates for both new and used vehicles.

For insurance quotes, contact your agent or insurance company about the vehicle you're interested in. You should be able to get an accurate estimate. Or go to the auto insurance website of your choice, and there should be an option to get an online quote. Do insurance and fuel costs add up to 7% or less of your monthly paycheck? Then you're OK.

In addition to the formula for car affordability, recognizing your own car-buying habits, good and bad, can offer clues to the best strategy for you.

For example, are you someone who buys a car, pays it off and then keeps it for a few years? Buying a new car would work for you: You have a track record of shopping within your means, finishing off the loan and going payment-free for a while. That's smart.

Do you get bored with a car after a few years? Then leasing is your best bet. What good is it to take out a six-year loan if you're going to trade in the vehicle during the fourth or fifth year? You'll likely owe more than the car is worth and will have to roll that balance into the next loan. You'd be better off leasing and paying less per month. Leasing also lets you get a nicer car for less money.

Finally, are you trying to make the most financially sound decision possible? Then buy a lightly used car, pay it off, and keep it for many years. The first owner takes the depreciation hit, and you'll have a car that's new enough to avoid major repairs for a while.

To make this budgeting less abstract, let's plug in some real-world numbers. The median weekly earnings of a full-time worker in the U.S. was $908 in the second quarter of 2019, according to the U.S. Bureau of Labor and Statistics. This amount translates to an annual income of $47,216.

Paying an estimated 20% in income taxes would translate to a monthly income of about $3,148 for a buyer we'll call John. If we follow our 15% rule, John could handle a monthly car payment of up to $472.

In September 2019, the average amount financed for a new vehicle was $32,928, according to Edmunds data. Let's say John bought a new Honda Pilot for that amount. We'll assume he has solid credit and that all aspects of the deal mirror the industry average. John made an 11% down payment, which comes out to about $4,075. The monthly payment will be $542 because John has opted for the most common loan term of 72 months.

He's already over budget and hasn't yet factored in fuel and insurance costs.

Those pencil out to $120 a month for fuel and about $140 a month for auto insurance, which means John's total monthly automotive expenses are actually $802, or 25% of his monthly take-home pay.

Some people might be OK with spending a quarter of their take-home pay on car ownership, but in John's case, it will put real stress on his financials. And what if you make less than John does? What if you have poor credit? Or what if you have other debt you're trying to pay down? It would make new-car buying a real challenge. The options now are to find a less expensive vehicle, lease or consider a used car.

What would the payment look like if John were to buy used? For starters, the sticker price would be lower than on a new vehicle, and there would be a lower threshold of credit needed for financing the auto loan. Assuming again that John goes with the averages, the amount financed for the used vehicle John chose would be $22,623. The down payment would be just over 10% ($2,660). The monthly payment would be $416, and it would take about 68 months to pay it off. The used-car loan would have an interest rate roughly 3 percentage points higher than that of a new-car loan. But that's typical for used-car lending.

Fuel costs would be roughly the same. Insurance would be slightly less because the car is used. This insurance savings, though, would likely be offset by the added maintenance that comes with an older vehicle. Let's call it a wash and assume the same estimate as for a new car: 8% of take-home pay for insurance and fuel.

By buying a used vehicle, John would be spending $676 a month, or about 21% of his monthly take-home pay. On its face, this purchase would seem to be the most cost-effective since John is taking out a smaller loan.

But it would take five and a half years to pay off the loan amount, at which point the car would be 8 or 9 years old. How much longer will John want to drive it? It's something to keep in mind when choosing a long loan term because the whole point of financing is to be free of a car payment eventually. And if John buys another SUV as soon as the old one is paid off, John might as well be leasing, so let's look at that.

A three-year lease in 2019 had a monthly payment of $465 and an average down payment of $2,646. Keep in mind that these averages are high because many leased cars are luxury models (think BMW, Mercedes-Benz and the like). Since John is not looking for a luxury vehicle, he should be able to find a midsize SUV for roughly $400 a month and about $1,800 down. One major difference, however, is that John would have to limit driving to about 12,000 miles per year, which is a common mileage limit for advertised lease specials. Adding more miles would cost an extra $25 per month, by our estimates.

John's lease payment would be an easier-to-afford $400 per month, or 12.7% of his take-home pay. When we factor in 7% of take-home pay for fuel and insurance costs, John would be spending about $660 per month on this car, which would be about 21% of his monthly income. That's a touch over our recommended 20% for all auto expenses.

In this scenario, John would be paying much less per month to lease than to buy. John would also have a little more in the bank because of the smaller down payment. On the other hand, John would be limited on the number of miles he can drive (without penalty) and would have to start the process over in three years when the lease is up.

There's a case to be made for each of these approaches to affordability. It is essential to recognize your car-buying history, and if you do commit to a long-term loan, make sure you drive the vehicle for at least a few years after it is paid off.

In the end, the best car-buying scenario will be one that takes into account your bills and other financial responsibilities. Don't shop for a car at the top of your budget. And if it's a stretch for you to buy now, consider saving up a bit more and revisit shopping at a better time. The most important things are to know your budget and remember that there's more to owning a car than just that monthly payment.