How to Determine How Much Car You Can Afford

Can I afford this car? What price car can I afford?

You can use an auto loan calculator to determine the price car you can afford to buy, based on monthly loan payments. Here's how:

We'll use our own auto loan calculator and show you the steps you should take. If you know how much you can afford to pay each month, we'll show you how to figure out the price of the car.

It's a bit of a trial-and-error process using the calculator to work backwards from monthly payment to car price.

Step 1

Let's assume you have no idea of the price of car you can afford to buy, but you know generally that you can afford to pay about $225 each month. Let's say you also know you can pay about $1000 as a down payment and that you have good credit — not great, but not bad either — because that will determine the interest rate you pay. So here's how we'll start.

We'll guess at the price of the car, say $12000, and start with a 48 (3 year) loan term. Plug in 10% for your loan interest rate since you have less-than-perfect credit. Here's how it will look:

Used car loan calculator step 1

Now click the Calculate button and get the results, which should be as shown below:

We now see that the monthly payment is $354, much more than the $225 we can afford.

Step 2

Let's try adjusting some numbers to get the monthly payment down. First, let's reduce the car sale price to $10000, as shown here:

used car loan payments

Which gets us the following:

Looks like the monthly payment is now $290. That is better and is getting closer but still not the $225 that we want. So let's make another adjustment.

Step 3

Let's make a change to the loan term to 48 months (4 years) which might be a little longer than you prefer, but let's see how it works out.

used car loan calculation

Which get's us the following results.

OK, that's more like it. Our monthly payment is now a very close $228, only $3 off our goal and probably good enough. So, we now see that we can afford a $10,000 car if we get a 10% used car loan for 48 months.

However, just for fun let's say you find a car for $12,000 that you like and want to keep your payments at around $225. You could try to negotiate the seller's price down from $12,000 to $10,000, or you could add $2000 to your down payment. The results of the payment calculation would be the same as above.

You could also extend your loan out from 48 months to 60 months, but it is not advisable for an older used car. In fact, most banks and financial companies won't approve a long loan for older cars.

Summary

It is a simple process to use a normal used-car loan calculator to work backwards to find how much car we can afford, if we know how much we can pay each month.

If you are looking for an online source of used cars and you have bad credit, consider Drivetime.com . They do their own financing, which makes it easier to qualify than getting bank loans through a conventional dealer.