Aim to spend no more than 10% of your monthly take-home pay on a car payment, but you may have flexibility.
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Financial experts recommend spending no more than 10% of your monthly take-home pay on your car payment and no more than 15% to 20% on total car costs such as gas, insurance and maintenance as well as the payment.
If that leaves you feeling you can afford only a beat-up jalopy, don’t despair. You can gain flexibility with your car payment using a balanced budget approach. Here’s how it works.
Before you hit the dealership or start car shopping online, take time to determine the maximum car payment for your budget.
Match with up to 4 lenders to get the lowest rate available with no markups, no fees, and no obligations.
When it comes to buying a new car, one of the biggest factors to consider is how much your monthly payments will be With the average new car price now over $47,000 in the US, a $600 car payment might seem pretty normal to some buyers. But is dropping $600 or more on a car payment every month really a smart financial move? Let’s take a closer look
How Car Payments Are Calculated
First it helps to understand what goes into determining your monthly car payment amount. There are a few key factors
- The price of the car
- Your down payment
- The interest rate on your auto loan
- The length of the loan term
Dealers will often stretch out loan terms to 72 months or even 84 months to help keep the monthly payments lower. But this comes at a cost – you’ll end up paying significantly more interest over the life of the loan.
What the Experts Recommend
Financial experts generally recommend keeping your monthly car payment under 10-15% of your take home pay.
For example, if you bring home $4,000 each month, a reasonable car payment would be:
- 10% of $4,000 is $400
- 15% of $4,000 is $600
So in this example, a $600 monthly car payment would be on the high side, but still within an affordable range if it fits your budget.
Dave Ramsey, a popular finance guru, advises limiting your total monthly car expenses (payment, insurance, gas and maintenance) to less than 20% of your take-home pay.
Factors to Consider
There are a few important factors to keep in mind when deciding if a $600 car payment fits your budget:
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Your total monthly income – The more money you make, the more you can afford to spend on a car payment. $600 may be easily affordable on a $6,000 take-home income but too much of a stretch on a $3,000 income.
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Your other debts and expenses – Before taking on a large car payment, look at what other expenses, debts and financial obligations you have each month. Be sure to budget for necessities like housing, food, health care, child care and savings goals first.
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Job stability – If you have a stable, reliable income you can afford more car payment than someone with an unsteady job situation or frequent layoffs.
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Down payment – The larger down payment you can make, the lower your monthly car payment will be. Save up if you need to avoid payments that are too much of a reach.
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Interest rate – Shop around for pre-approval and competitive interest rates. Even a couple points difference in APR can equal big savings. Good credit (scores above 720) qualify you for the best rates.
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Loan term – Stretching out your loan to 6-7 years may seem tempting to lower the payment but it dramatically increases interest paid over the long run.
The Downsides of High Car Payments
There are good reasons why experts caution against car payments that make up too large a portion of your budget:
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Less money for other goals like retirement, college savings or an emergency fund
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Higher risk of missing payments and damaging credit
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Financial stress and anxiety each month trying to make ends meet
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Less flexibility in your budget if unexpected expenses come up
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More interest paid over the loan term
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Increased risk of being underwater on auto loan (owing more than car is worth)
Alternatives to Expensive Car Payments
If you determine that $600 per month is too much of a car payment for your situation, here are some things you can do:
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Make a larger down payment – Save up to put down 20% or more so you can get lower monthly payments.
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Get a less expensive car – Opt for a gently used car or a less premium new car with fewer options to reduce the sales price.
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Get a shorter loan term – Stick to a 3 year loan instead of 5-6 years to pay the car off faster.
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Buy out your lease early – Consider buying out the remaining payments if you have positive equity and already have a lease.
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Refinance your current auto loan – You may be able to reduce your interest rate and payment by refinancing.
The Final Word on $600 Car Payments
At the end of the day, only you can decide if committing to a $600 monthly car payment makes sense for your unique financial situation. Run the numbers, be realistic about your budget, and don’t forget to factor in insurance, gas and maintenance costs. While driving a fancy new car may be tempting, make sure not to put yourself in a financial hole that will be a struggle each month. Carefully consider all your options to find an auto payment you can afford over the long haul.
Set your car payment budget
NerdWallet recommends using the 50/30/20 rule when setting your overall budget. To do this, divide your take-home pay into three general spending categories:
- 50% for needs such as housing, food and transportation — which, in this case, is your monthly car payment and related auto expenses.
- 30% for wants such as entertainment, travel and other nonessential items.
- 20% for savings, paying off credit cards and meeting long-range financial goals.
A monthly auto loan payment typically falls into the “needs” category. If you’re buying a car, it’s most likely essential for getting to a job or taking the kids to school.
However, the balanced budget approach can provide flexibility. For example, if you split housing costs with a roommate, you could have a higher percentage available for a car payment in the “needs” category. Or, if you want a more expensive car, you could consider part of your monthly payment as spending in the “wants” category.
The key is keeping the budget balanced overall. If you plan to spend less in some areas, then you may choose to spend more than 10% of your take-home pay on a car payment.
When you know how much your car payment should be, you can back into what you can afford to spend on a car. NerdWallet’s car affordability calculator lets you start with a monthly car payment to estimate a realistic car price.
How do lenders determine a car payment?
Several factors contribute to the amount of your car payment.
- The loan amount.
- The length of the loan.
- The annual percentage rate, or APR, which includes the interest rate and any lender fees.
Having a maximum car payment amount in mind, and sticking to it, can help when negotiating at a dealership. But beware if a dealer encourages you to go with a longer loan term to reduce your monthly car payment. Taking out a longer loan can result in paying considerably more in interest over the life of the loan. NerdWallet typically recommends loans of no more than 36 months for used cars and 60 months for new cars, though that may be more difficult in today’s market.
If you focus only on the monthly car payment and ignore total financing costs, you could waste a lot of money. For example, look at how two different loans can result in the same car payment.
|
Monthly payment |
Loan amount |
APR |
Term |
Total interest |
|---|---|---|---|---|
|
$530 |
$22,318 |
6.57% |
48 months |
$3,122 |
|
$530 |
$28,804 |
9.75% |
72 months |
$9,356 |
The interest rate on your auto loan also affects your car payment. The rate you pay to borrow money depends on your credit score and other factors, and lower credit scores generally result in higher rates. But rates vary from lender to lender, so it’s smart to shop around to find the most competitive rate on your auto loan. It’s especially important if you need a bad credit auto loan because these loans tend to have the highest rates.
You can use NerdWallet’s auto loan calculator to compare various rates and terms.
I Make $2,000 a Month And I Have a $600 Car Payment
FAQ
How much do I need to make to afford a $600 car payment?
| Annual salary (pre-tax) | Estimated monthly car payment should not exceed |
|---|---|
| $75,000 | $625 per month |
| $100,000 | $833 per month |
| $125,000 | $1,042 per month |
| $150,000 | $1,250 per month |
Is $600 a month good for a car?
With car prices higher than ever, even $600 a month likely won’t cover a brand-new car in today’s market. That said, this budget can still go a long way toward finding a reliable, family-friendly car if you approach the process with the right strategy and priorities.
Is $600 a high car payment?
Unless you’re making $150k+ a year, $600 is too much for just a car payment. While not bad advice, that’s probably a little aggressive.
What is considered too high of a car payment?
According to experts, a car payment is too high if the car payment is more than 30% of your total income. Remember, the car payment isn’t your only car expense! Make sure to consider fuel and maintenance expenses. Make sure your car payment does not exceed 15%-20% of your total income.
What if my car payment is too expensive?
Consider the following options to take if your vehicle payment is too expensive. Refinance your loan: Refinancing your vehicle loan is taking out a new loan to replace your current one, but with rates and terms that better fit your budget. It’s smart to calculate potential savings ahead of time to find one that best suits your needs.
How much should you spend on your car?
Financial experts recommend spending no more than 10% of your monthly take-home pay on your car payment and no more than 15% to 20% on total car costs such as gas, insurance and maintenance as well as the payment. If that leaves you feeling you can afford only a beat-up jalopy, don’t despair.
How much should a car payment be?
According to Karen Bennett, senior consumer banking reporter at Bankrate, your vehicle monthly payment should not exceed 10 to 15 percent of your pre-tax take-home salary. Below are some examples for different salaries. To find this range for your salary, divide your annual pre-tax take-home salary by 12.
Should you buy a new car with a larger down payment?
Longer terms mean a lower monthly payment (but more interest paid over time). If you plan on trading in your old vehicle, include it as a down payment. A larger down payment offsets your monthly payment. According to most recent Edmunds data, the average down payment for a new vehicle was about 15 percent of the purchase price.
Should you focus on a monthly car payment?
If you focus only on the monthly car payment and ignore total financing costs, you could waste a lot of money. For example, look at how two different loans can result in the same car payment. The interest rate on your auto loan also affects your car payment.
How much is a new car payment a month?
In today’s market of inflated car prices and payments, the average monthly new-car payment has surpassed $700, according to the vehicle affordability index provided by analytics companies Cox Automotive and Moody’s Analytics. Some car buyers are delaying their purchase, with the hope that car prices — and payments — will eventually fall.