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How Much Vehicle Can You Afford?

Whether you are shopping for a new or used vehicle, buying a vehicle can be a very exciting time in anyone's life. But as with any other large purchase, it's wise to crunch some numbers and see what you can comfortably spend each month on a car payment.

As a baseline, it is recommended that you should spend no more than 10-15% of your monthly take-home pay on your auto loan payment and no more than 20% for the auto loan payment plus other recurring costs such as auto insurance, gas, and routine maintenance to keep your engine running smoothly.

By understanding the various elements of purchasing a new vehicle and using our Vehicle Affordability by Loan Term Calculator, you can make an informed decision that aligns with your finances and ensures you choose a loan term that best fits within your budget.

How is an Auto Loan Calculated?

When you take out an auto loan, you borrow a specific amount of money to purchase your vehicle and then repay that loan over a set term, typically with added interest. Here's how the three main components work together:

  1. Principal Amount: This is the total amount of money you borrow to buy the vehicle. It's the purchase price minus any down payment and trade-in value.
  2. Interest Rate: This is the cost of borrowing the money and is commonly referred to as an annual percentage rate (APR). It's how lenders make money from loaning you funds to purchase a vehicle.
  3. Loan Term: This is the period over which you'll repay the loan. Common terms are 12, 24, 36, 48, or 60 months. The longer the term, the lower your monthly payments, but the more interest you'll pay over time.


How to Calculate Auto Loan Interest

To calculate the monthly interest on an auto loan, use the following formula:

Monthly Interest = (APR/12) x Loan Balance

For example, if you have an annual interest rate of 6% and a loan balance of $15,000, the monthly interest would be:

(.06/12) x 15,000 = 0.005 x 15,000 = 75

$75 would be your monthly interest on a $15,000 auto loan with a 6% APR.

Auto Loan Term Lengths

Auto loan term lengths can range from 12 to 60 months—or even longer depending on your lender. The following are the most common auto term lengths with brief explanations to help determine the pros and cons of each:

  • 12 Months: Higher monthly payments with less interest overall.
  • 24 Months: Lower payments than 12 months, but increased interest.
  • 36 Months: A balanced term length with moderate payments and interest.
  • 48 Months: Lower monthly payments with more interest over time.
  • 60 Months: Lowest monthly payments but the highest interest paid overall.


A Breakdown of Your Vehicle Purchase

Understanding theses five component of a vehicle purchase can help you budget more effectively and make the right choice:

  1. Purchase Price: The total cost of the vehicle.
  2. Down Payment: An upfront payment that reduces the overall amount you need to finance on your auto loan.
  3. Loan Amount: The amount you will borrow based on the purchase price minus the down payment and any trade-in value.
  4. Interest Rate: Based on your credit score and current market rates.
  5. Sales Tax: The tax on the sale of the vehicle as determined by your state.


Using these numbers, you can better determine what monthly payment you may expect on your auto loan based on total price.

How to Value Your Trade-In Vehicle

A valuation on your vehicle may vary and depends on many factors including age, mileage, the condition of the exterior, interior, and mechanical components, and more. Three ways to find the best value for the trade-in are:

  1. Do Online Research:Kelley Blue Book and Edmunds are respected industry resources to find an estimated value based on your vehicle's make, model, year, and condition. A dealership is not beholden to paying you the amount estimates you find on either of these sites, but you will have a ballpark understanding of what your trade-in is worth and be better prepared for negations with a dealer.
  2. Get Multiple Offers: If you go the traditional route and work with a dealer, consider visiting several dealerships to get make sure you are getting the most value out of your trade-in vehicle—even if you are satisfied with your first quote. There's no harm in trying to find the best offer available to you.
  3. Consider a Private Sale: Selling your vehicle privately may bring you a higher dollar amount than a traditional trade-in to a dealership.


By understanding these elements and using a "Vehicle Affordability by Loan Term Calculator," you can make informed decisions that align with your financial situation and ensure you choose a loan term that best fits your budget.

At UMCU, our vehicle loans don't only cover car purchases—we are also happy to help you buy a new RV, boat, or motorcycle.