The cost of driving includes more than your loan payment – there’s insurance, fuel, and maintenance too. Here’s how to calculate what you can afford.
A bank or credit union typically considers your credit score, debt-to-income ratio, value of the vehicle, and ability to make a payment when determining how much it will lend.
But you should probably consider additional factors when it comes to figuring out what you can afford.
When you’re shopping for a vehicle, consider not only the payment, but also the extra expenses of owning that new set of wheels. Simply put, a loan payment gets you on the road, but the extras like insurance, fuel, maintenance, and repairs keep you driving. Remember to budget for these costs accordingly when you calculate how much car you can afford.
Here are a couple examples of how the numbers work out.
Pay grade: E3
Pretax Income: $2,600
Total Transportation Budget: $390-$520
Marcus estimates 15-20% of his pretax income to be $390-$520. He should limit his monthly transportation costs (payment, fuel, insurance and maintenance) to this amount or less.
Pay grade: O2
Pretax Income: $4,800
Total Transportation Budget: $720-$960
Angelina estimates 15-20% of her pretax income to be $720-$960. She should limit her monthly transportation costs (payment, fuel, insurance and maintenance) to this amount or less.