Whether you live in the east, the central or western part of the country, you need a car to commute. Though traveling through our nation is lovely, it can also take a pounding on your car (and purse), leading to you needing a new car after five or ten years of usage. But before jumping on that car purchase, you need to ask yourself, “How much car can I actually afford?”

There’s a rule of thumb made by financial pros: Spend a max of 10% of your pay on a car loan and max of 20% on your car’s total expenditures – such as repairs, insurance, maintenance, gas, etc.

The moment you know what car loan you can afford to pay monthly, calculate the amount you can comfortably borrow for your car loan. It will help you set a target price that is realistic and answer the probing question, “What vehicle can I pay for?”

The real meaning of “Affordable”

Getting wrapped up in buying a car that meets your heart’s desire is very easy. However, being able to afford to pay your monthly loan is more vital than anything.

Car buyers often look at “affordability” in one of two ways:

  1. Go for a new car so I don’t have to worry about problems that may arise and maintenance.
  2. Go for a used car to save money on the loan, lease, and other car expenses/features.

The thing is, both of these assumptions are not necessarily correct, and that is the truth. Whether you by a new or used car, you will have to include it in your budget.

When determining what “affordable” means, here’s a few things to bear in mind:

  • Your credit rating
  • How much savings do you have for down payment
  • How fast do you wan to pay off your car loan
  • The sales tax in the region you reside in
  • What interest rate you qualify for

Using a car affordability calculator

Some auto loan calculators start with the sum of the loan amount you need and other variables before calculating your monthly car payment. The car affordability calculator on NerdWallet starts with your preferred monthly payment and proceeds to display the loan amount you can afford.

To start with the car calculator on NerdWallet, the monthly payment you think you can afford and the length of the loan payment you need should be entered into the calculator. Then select the car type; whether “new” or “used” and proceed to pick your tier of credit.

The calculator lets you adjust your loan terms and enter various inputs to customize your loan amount.

Defining how much car you can afford

Hundreds and even thousands of dollars can be saved in the long run if you calculate the amount you can pay for a car before visiting a car dealer – in addition, you won’t be played with.

Here are the steps:

  1. Calculate the amount you can pay

For instance, if you earn $3,000 monthly, you should spend $300 max on your car loan. Being realistic about how long you want to or can afford to make monthly payments is vital. Financial experts recommend a term of 36 months for payments on used cars and 60 month payments on new cars.

Longer loans may lower the amount you pay every month but you tend to pay more than the vehicle’s real worth and this may result to being upside down in the contract.

  1. Calculate loan you can afford

You can only get insights on how much loan you can afford after calculating the amount you can pay monthly. The amount you can borrow is dependent on varying factors such as credit score, whether you’re shooting for a new or used car, and your loan term.

  1. Set a purchase price for yourself

The amount you can afford in sum is not necessarily the price of the vehicle you should purchase.

If you’re trading in your old car or making down payments, you should be able to borrow less money or buy a vehicle that is higher-priced.

When hunting for a car to buy, always set your budget below the loan amount you can afford. There are other fees and sales tax that may add a few thousand bucks to your total bill and that can be surprising to your wallet. This is a major purchase after all. Making the wrong decision and burying yourself in debt is going to linger a lot longer than when you pay an extra dollar for that second scoop of ice cream you really didn’t need. Know your finances, take your time and maybe most importantly, find a car dealership that’s willing to work with you.

One of the easiest ways to save money and reduce your loan amount is by not paying sticker price. Knowing what car’s or worth or shopping at a dealership such as DriveNation which has live market pricing, means you can get that deal you’re looking for and don’t’ even need to haggle for it. Find these types of small advantages in your favour and you’ll be getting more car for your dough.