How Much Vehicle Can I Afford: Understanding Auto Loans in 2022

Auto Loan


3 min. read

By: FCU Team

Savvy car shoppers know the biggest decision-making factor when buying a vehicle isn’t the latest tech integration or shiniest coat of paint — it’s knowing (and sticking to) how much car you can afford. Choosing between fabric and leather should take a back seat to comparing auto loan rates, terms and purchase prices. Test-driving lender and dealer offers is just as key a step as what it feels like behind the wheel. If you’re planning a car purchase in 2022, we have your guide to making the best financial choice.

The Personal Finance Rule of Thumb for Car Buying

Generally, your car payment should be no more than 10% of your take-home pay each month. Including gas, maintenance, car insurance and any necessary repairs, the total amount you spend on your vehicle each month shouldn’t exceed 20% of your monthly income after taxes. There are special circumstances to account for and general rules may not apply in all cases. However, this is a good starting point when planning your upcoming car purchase and calculating the payments that fit into your budget each month.

How to Determine How Much Car You Can Afford

Step 1: Calculate the car payment that fits in your budget

Before setting your sights on a cherry red convertible or sensible SUV, you must first figure out how much you can afford to spend each month on car payments. Unless you’re paying for your new or used ride in cash, you’ll likely finance at least a portion of your purchase and that means you’ll be on the hook for a set amount every month. Calculate a car payment with our auto loan payment calculator!

Going by the standard 10%-or-less rule, if your take-home pay is $3,500 a month, your car payment should be no more than $350.  

Step 2: Research auto loan rates and terms

Once you know the number you’re shooting for when it comes to your monthly auto payments, it’s time to research available interest rates and terms. These numbers play a major role in determining the car you’ll drive off the lot. Here’s what you’ll need to be familiar with:

Annual percentage rate: The APR on your loan refers to the interest rate you’ll pay on your loan, as well as any borrowing fees your lender charges. This is the number you’ll most commonly see advertised on auto loan offers, but don’t confuse it with the interest rate. When shopping for car loans, be sure you’re comparing APR to APR and search for the lowest rate you can qualify for based on your credit score.

Loan term: The length of time over which you pay back your auto loan is up to you, with common terms being 36, 48, 60 and 72 months. The longer your term, the lower your payments but the more you’ll end up paying in interest over the life of your loan. A shorter term means you’ll pay your car off faster and pay less interest, but it also means your payments will be a bit higher.

Step 3: Calculate the car loan you can afford

With an idea of the APR you qualify for based on available offers, you can use an auto loan payment calculator to explore your options. See which terms work for your budget, your down payment and how much you plan to finance.

Step 4: Make a plan to pay off your loan

Congratulations! You’ve bought a new (or new to you) car. You may have taken advantage of special offers for deferred payments which means you won’t have to start paying back what you borrowed for a few months. But that doesn’t mean it’s time to relax on your personal finance goals.

Although you have pre-set terms for paying back your car loan, it’s important to stay on top of what you owe. Make a visual reminder of your loan pay-off date on a calendar or place you see frequently. If your loan has no pre-payment penalties, consider making extra payments to eliminate your car loan sooner. However you approach your pay-off plan, stay focused on your goals while enjoying your new ride.      

Buying a Car with FCU

We’ve broken down understanding how much car you can afford into simple terms, but if you need additional guidance on your car-buying journey, we’re here to help. FCU offers competitive rates on auto loans with a variety of terms, as well as our online car buying service that lets you shop and price match vehicles from your home or phone. Find out more and get started with a credit union-powered car loan today.