Car Payment Guide: Calculating What You Can Afford

Quick Facts About Car Payments

• Your car payment typically includes the vehicle and its destination fee, taxes, doc or additional dealer fees, plus any add-ons like a towing package. 
• Find out your credit score before applying for a loan because it could save you money.
• Autotrader’s My Wallet lets you search car inventory using your specific budget and factors, including your car trade-in value and credit score. You can even search by a particular payment based on actual interest rates.

Buying a car is a significant event, with the average new car price recently topping $49,000. For most buyers, this high-ticket item requires financing with an auto loan. Average monthly payments for new car loans climbed to a record high of more than $760. A used car buyer in today’s market must also devote a hefty chunk of their budget to paying for an auto loan.

The first step for potential buyers is often figuring out the monthly payment they can afford. Use our guide to learn about car payments to help estimate how much you can spend each month for your new ride. We’ll help you understand loan payments, interest rates, credit scores, and other considerations with financing a car purchase. This information can help you focus on a price range while car shopping.

• How to Budget for Your New or Used Car
• What Does a Car Payment Include?
• How to Calculate a Car Payment
• How to Find Out Your Credit Score
• Determining Car Taxes and Fees
• How to Get a Low Car Payment
• Tips for Buying a Car

How to Budget for Your New or Used Car

Before kicking tires at the dealership, use our car budgeting and affordability calculator. The easy-to-use tool can help you determine the maximum price for an automobile you can afford based on your preferred monthly car payment.

The tool will ask you for factors including:

• Monthly car payment target
• Information on cash down payment
• Details about car trade-in value
• Preferred loan terms
• Sales tax rate

When you plug in the details that affect your monthly payment, the tool estimates a car price to give you a target range to aim for when shopping.

These days, vehicles are selling at or close to the manufacturer’s suggested retail price (MSRP) because of high demand from potential buyers and short supply from manufacturers. While this trend isn’t good for wheeling-and-dealing at the car lot, expecting to pay the sticker price helps you plan a likely budget.

What Does a Car Payment Include?

The monthly payment for your financed new or used car can cover more than the price of the vehicle. The loan — and your car payment — may include other fees associated with buying a car:

• Taxes
• “Doc” fees or additional dealer fees
• Destination charge
• Vehicle service or maintenance contract
• Extended warranty
• Other add-ons purchased at the time of delivery, like a roof rack or towing package

Lenders and dealers determine the car payment based on many considerations. The most obvious factor for the loan amount is the price of the car minus the cash down payment and trade-in allowance. Interest rates for new vehicles typically are lower than used car rates.

Length of Loan

Your next consideration will be the length of the loan or the number of months to repay the money. Shorter loan terms create a higher monthly payment. Longer loan lengths bring lower monthly car payments.

However, longer repayment terms mean that you’ll pay more in interest over the life of the loan.

Loan lengths typically range between three to five years or 36 to 60 months. But some take loans for shorter or longer periods.

Interest Rates

Loan interest rates change the amount of your car payment. Borrowers with higher credit scores generally qualify for lower interest rates and sometimes zero-interest loans because lenders see those customers as less of a risk.

If you have a lower credit score, you might obtain a better interest rate by making a larger down payment. More money down reduces the loan amount and, in turn, your monthly interest charges.

Lenders also consider your total income when deciding the interest rate for your loan. The percentage of your income used for debt payment, or debt-to-income (DTI) ratio, indicates your ability to repay the loan. Having a lower DTI increases your chances of obtaining a lower interest rate.

How to Calculate a Car Payment

Our car loan payment calculator can help you estimate how much the monthly car payment will be for your next vehicle. When you’re shopping to get behind the wheel of your next vehicle, enter basic information into the tool to see how different factors affect a car payment.

You’ll enter information including:

• Car cost
• Loan length
• Interest rate
• Down payment
• Trade-in car value (if applicable)

This information and other criteria will help you instantly calculate an estimated monthly cost of financing for your car payment. Use this simple calculator alongside our affordability tool to find the price point that fits your budget.

The calculators ask for information about the value of the vehicle you’re trading in. Our car valuation tool can help you determine that figure using basic info about your current automobile.

TIP: Supply chain disruptions from the COVID-19 pandemic reduced new car availability.  Fewer vehicles in the market ratcheted up car prices for both new and used vehicles. As a result, there’s less wiggle room for negotiation. Demand for some used cars remains high. So before you negotiate your trade-in, first get the best price on the vehicle you’re buying. Once you and the dealer agree to the final sale price, negotiate the trade as part of the deal.

How to Find Out Your Credit Score

Knowing where your credit stands before applying for a loan could save you a lot of money.

The major credit bureaus — Experian, Equifax, and TransUnion — gather account information from your creditors to assemble your credit history. A credit report may include a summary of information, including credit limits, high balances, current balances, payment histories, etc. It tells a potential lender how much indebtedness you currently have and how reliably you have paid your bills in the past.

A vital component of a credit report is your credit score. This number is assigned using complex calculations to indicate if someone is more likely or less likely to miss a payment. The farther away you get from past credit problems, the more your score increases. Borrowers with higher credit scores qualify for better loan rates.

According to Equifax, the credit score ranges are as follows:

• 300-579: Poor
• 580-669: Fair
• 670-739: Good
• 740-799: Very Good
• 800-850: Excellent

Check your credit card, financial institution, loan statement, or credit bureaus to find your credit score. Many credit card companies, banks, and loan companies provide credit scores for their customers. According to Equifax, you can obtain a free credit report every 12 months from each credit bureau. During the COVID-19 pandemic, credit bureaus offered more free credit reports, though that benefit may end in 2024.

My Wallet

Autotrader offers another tool called My Wallet, which puts everything together for you.

My Wallet lets you search car inventory (even in a tight market) using your specific budget and factors, including your car trade-in value and credit score. You can even search by a particular payment based on actual interest rates. It puts the car buyer in control before stepping foot in a dealership.

To find the My Wallet dashboard, go to Autotrader and look in the upper right corner for the wallet icon with a dollar sign to access the My Wallet tool.

Determining Car Taxes and Fees

The sale price of a new car isn’t final until the invoice includes destination charges, dealer fees, and taxes. The car window sticker lists some fees, while others aren’t mentioned until you’re ready to sign the paperwork.

A destination charge, sometimes called a freight fee or freight delivery charge, ensures new car buyers pay equally to cover the cost of delivering a vehicle to a dealership. According to United States law, car delivery always gets listed as a separate line item on a new car window sticker. Destination fees range from about $850 to $2,000 and are not negotiable.

Other common dealer fees aren’t obvious because they don’t appear on the car window sticker:

• Sales tax: Make sure to research your state’s regulations on tax rates before buying a car and understand how the collection affects your final sales price.
• Title and registration: Dealers pay these fees to process the title and registration of the car. It’s a standard fee and saves car owners a trip to the state motor vehicles department. Know your state’s fees ahead of time, and make sure the invoice charges are reasonable for the dealer to handle this paperwork.
• Delivery: If you see a delivery fee in the final charges for the car, ask the dealer about it because it may be negotiable.
• Documentation: Sometimes known as a “doc” fee, these fees cover the sales documentation preparation costs. Some states regulate these fees.
• Other: Check this category carefully on your sales invoice. Other fees, such as those for reconditioning, vehicle prep, additional dealer markup or profit, and factory holdback, are a few charges that might show on your invoice. It can’t hurt to ask to remove these fees.

How to Get a Low Car Payment

Try these strategies and tips to get lower car payments. Some will take time to implement, while you can use the other advice immediately.

• Select a less expensive used car. You might save hundreds of dollars each month by choosing a used model over a new vehicle.
• Make a larger down payment. While you shouldn’t wipe out your entire savings, make a down payment that fits your budget because the larger it is, the smaller your monthly car payment.
• Extend the length of the loan. Longer repayment terms create smaller monthly payments. Just know that these can cost more in the long run.
• Avoid unnecessary fees. Pay attention to what you’re signing and question everything you see on the invoice. Every dollar contributes to your monthly payment.
• Boost your credit score. Improving your credit takes time, but a good credit score will help you qualify for better interest rates.
• Reduce debt. A lower debt-to-income ratio shows lenders that you can pay off the loan, increasing your chances of getting a good interest rate.

Be sure to shop around and do your homework for the best deals and loans on a vehicle. You aren’t required to finance your car through the dealer’s preferred lender.

However, automakers’ lenders sometimes offer new auto loans with 0% or low-interest rates for well-qualified buyers.

Tips for Buying a Car

Learning to buy a used car or brand-new vehicle is the initial step toward car ownership. Because most people don’t buy cars as often as they purchase shoes, it can be intimidating and stressful.

The primary cause of stress stems from the finances involved with buying a car. To ease the anxiety and make the process smoother, determine your budget before you begin shopping and studying negotiating tips.

Factor in all expenses related to ownership when planning how much you can afford for a vehicle. In addition to the monthly car loan payment, you’ll have gas, repairs, and maintenance costs.

Car insurance is a required critical cost of ownership. Insurance coverage for specific makes and models might put them out of your reach. You can save time and avoid potential frustration or disappointment by writing down VINs (vehicle identification numbers) of cars online that interest you early in the process. Then, get a few sample insurance premium quotes before continuing to shop for your new wheels.

Read Related Car Financing Articles:

• Car Financing Caution: Beware of Big Balloon Payments
• Lease vs. Finance a Car: 5 Things to Consider
• Car Financing Options for Recent College Graduates

Editor’s Note: This article has been updated for accuracy since it was initially published.