How Much Should My Car Payment Be?

Car payment rules of thumb

When deciding how much you can afford for a car payment, use the 20/4/10 guideline as a starting point to ensure the vehicle’s costs fit your monthly budget.

According to the 20/4/10 rule, you should aim to make a down payment of 20% of the vehicle's total cost and be able to pay off the loan in four years (48 months) or less, all while keeping your total monthly car expenses (loan payment, gas, maintenance and insurance) to less than 10% of your pre-tax monthly income.

Calculate payments using take-home pay

The 20/4/10 rule uses pre-tax (gross) income as a guideline.

However, you should also evaluate your total transportation costs as a portion of your take-home pay (after taxes) and plan to spend no more than 20%. Your car payment specifically should also be no more than 10% to 15% of take-home pay.

For example, if your monthly take-home pay is $3,000, keep your car payment below $450.

Look beyond the 20/4/10 rule

Keep in mind that even if the 20/4/10 rule suggests you can afford a certain car payment, that doesn’t necessarily mean you can with your current expenses. You may also be paying off other debts, such as credit cards or student loans, that this guideline doesn’t account for.

Ultimately, evaluating your budget alongside the 20/4/10 rule will help you determine how much you can comfortably afford.

How to calculate a budget-based car payment

Before getting a car loan, make sure you have a budget in place and know your monthly expenses. Start with your monthly take-home pay as your budgeting baseline, then add total monthly transportation costs in to see if it fits.

Budget for the full cost of car ownership, not just the monthly payment.

The bottom line is that you don’t want a car payment that leaves little to no room in your budget for savings or other expenses.

Plan for costs beyond your car payment

Use online calculators to estimate monthly costs for other transportation expenses, including car insurance premiums, state vehicle taxes, fuel and regular maintenance.

For example, certain vehicles, like SUVs and trucks, typically have higher yearly costs than sedans, so you’ll want to account for those increased costs in your budget.

Set a maximum all-in monthly cost

Analyzing your budget and knowing what you can afford helps you avoid the temptation to overspend on a vehicle. Set a total cost limit below the top end of what you can spend, in case future income disruptions require you to reevaluate your spending.

For example, if you can afford a $400 car payment, aim for a less expensive vehicle that keeps your payment at $350 or less.

How car loan terms change payments

Your credit score plays a key role in your monthly car payment. It determines which interest rates you qualify for. The higher your score, the lower your rate and monthly payment.

In addition to credit, other factors that affect payments include:

By law, lenders must present accurate payment amounts before you sign for any loan.

• Loan term: Longer terms mean lower monthly payments, so many borrowers extend their car loan terms to reduce monthly payments. However, you’ll pay more in interest over the life of the loan.
• Interest rate: Lenders charge an annual percentage rate (APR) on car loans. The APR is the total annual cost of the loan and includes interest as well as any additional fees, such as origination fees or other finance charges. With longer terms, APRs increase. For example, APRs may start at 5.49% for 36 months and 6.49% for 60 months.
• Down payment: A higher down payment reduces your monthly payment and the total interest you’ll pay. The best auto lenders will typically offer better APRs with higher down payments. A higher trade-in value also lowers the amount financed and, ultimately, your monthly payment.
• Taxes and fees: Sales tax and other add-ons, like extended warranties, will increase your monthly payment because you'll need to borrow more than the car’s sale price.

Because so many factors affect the monthly payment, ask the lender for quotes outlining different payment scenarios based on down payment and loan terms. A slightly higher down payment and a shorter loan term could save you thousands in interest.

How vehicle choice affects payments

When deciding between a new and a used vehicle, consider all the cost factors involved.

New cars

New cars may have lower interest rates, but they cost more than used cars. Even with lower interest rates, new cars have higher monthly payments because the loan amount is larger. New cars also depreciate faster in the first few years, so their value drops while the loan balance stays high, putting you at risk of being upside down on your loan.

Certified pre-owned cars

Certified pre-owned vehicles cost about 2% to 5% more than other used vehicles, so they come with a higher upfront cost. However, lenders may offer lower rates on certified pre-owned cars, which can lower your monthly payment more than with a non-certified used car.

Leased cars

Leasing a vehicle may seem appealing if you want the lowest monthly payment. But keep in mind it comes with fees and penalties when the contract expires, usually after 24 to 36 months. You also build no equity in the vehicle, so you’ll keep making monthly payments if you roll into another lease. With buying, you eventually pay off the loan and stop making payments.

Costs and trade-offs

The chart below outlines the cost differences between vehicle and payment types:

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