Is 400 Too Much for a Car Payment?

Deciding how much to budget for a car payment is an important financial consideration. With the average new car price now over $47,000 in the US it’s no wonder many people are wondering if $400 per month is too much to pay for a car. In this comprehensive guide, we’ll break down all the factors to consider when determining if $400 is too much for your personal car payment budget.

What Experts Recommend for Car Payments

Financial experts generally advise limiting your car payment to 10-15% of your monthly take home income. For example if you bring home $4000 per month, you should aim to keep your payment under $400-600 per month.

Greg McBride, a financial analyst at Bankrate, advises keeping car payments at or below 15% of your pre-tax income. So if you make $50,000 annually, your payment could be up to $625 per month.

While there aren’t hard and fast rules, aiming to keep your payment within these general percentages of income is wise. It ensures your car expenses don’t overwhelm your budget.

Average New Car Payment Amounts

In 2021, the average monthly payment on a new car was $648, and the average used car payment was $503. With new car prices continuing to rise in 2022, monthly payments are increasing as well.

For comparison’s sake, here’s a look at average monthly payments over the last several years:

• 2018 – $525 (new), $391 (used)
• 2019 – $554 (new), $412 (used)
• 2020 – $582 (new), $435 (used)

So while $400 per month may have been below average a few years ago, now it aligns closely with average used car payments. For a new vehicle, it falls a bit below the current average amount.

Key Factors That Impact Car Payment Amounts

When evaluating if a $400 monthly car payment is too much for your budget, here are some of the most important factors to consider:

Loan Amount

The total amount you borrow directly impacts your payment. The higher the loan amount, the higher the monthly payment. Even an interest rate of 5% on a $40,000 loan results in payments around $740 per month. You’ll need to borrow a lower amount to keep payments near $400.

Interest Rate

The interest rate you’re able to qualify for greatly affects your payment amount. Most people with good credit can qualify for rates of 5% or less for new cars. But borrowers with poor credit often pay 10-20% interest or more. Higher rates mean you’ll pay much more overall for the same vehicle.

Loan Term Length

Lenders allow terms from 36-84 months typically. Shorter terms (3 years) mean higher payments, while longer ones (7 years) reduce the monthly costs. Just make sure to avoid extremely long loans, which cost much more in interest.

Down Payment

The down payment decreases the loan amount, so putting more money down leads to lower monthly payments. Even just $2,000-$3,000 down can make a $400 payment achievable on a moderately priced vehicle.

Brand New vs. Used Vehicle

Since used cars cost significantly less than new ones, buying pre-owned can help keep payments under $400 per month. Even a 2-3 year old used car costs 30-40% less than new with relatively low miles.

Car Price

The total price you pay for the vehicle greatly determines the payment. It’s extremely difficult to keep payments around $400 when buying a luxury SUV for $60,000. But on a sedan priced at $25,000, it’s easily doable.

Is $400 Too Much for My Budget?

Now that we’ve explored the major factors impacting car loan payments, how do you evaluate if $400 per month fits your personal budget? Here are some questions to ask yourself:

• What is my take home monthly income? Don’t just consider your salary. Be sure to account for taxes, insurance, 401k contributions that lower your actual take home pay.

• What percentage of my income is $400 per month? Is it over 15%? If so, that’s on the high side.

• What other debts and expenses do I need to factor in? Include items like housing costs, student loans, credit card or personal loan payments.

• How much do I already spend on transportation? Are you comfortable spending more than that?

• What is the total price of the vehicle? Is it realistic for my income and budget?

• How much can I afford for a down payment? The more you put down, the lower the loan amount and payment will be.

Run the numbers for your specific situation. Weigh the car payment in the context of your overall financial life. That will give you the truest sense of whether or not $400 per month exceeds your car budget.

Tips for Keeping Car Payments Under $400

If you’ve determined $400 per month is more than you’d like to spend, use these tips to keep car payments lower:

• Shop for used vehicles – Even vehicles that are 2-3 years old cost significantly less than brand new.

• Put down a larger down payment – This lowers the amount you need to finance.

• Extend the loan term – Longer loans (5-6 years) means lower payments. Just avoid going over 6 years.

• Improve your credit score – Better credit means qualifying for lower interest rates on your auto loan.

• Choose a less expensive car – Scale back on size, features or luxury to find a lower price tag.

• Buy out a current lease – If you have positive equity, this provides a relatively low-cost way to buy your car.

• Buy privately – Private party sales are usually much cheaper than dealerships.

The Bottom Line

At the end of the day, only you can decide if $400 per month fits comfortably within your auto budget. Be realistic about what you can afford based on your income, expenses, and financial goals. While staying under 15% of your take home pay is a smart guideline, be flexible and run the numbers for your unique situation.

With the right combination of car price, down payment, credit score and loan term, a $400 monthly payment is achievable for many car buyers. But it also exceeds the budget for others. Crunch the numbers for your specific circumstances and purchase to determine if $400 per month is the right amount or too much for your auto financing needs.

A car payment is generally considered high when it exceeds 10-15% of your monthly take-home pay.