Auto Loan Calculator: See How Much You Can Afford

For most consumers, buying a vehicle comes down to calculations:

• What’s the monthly payment?
• Will the car hold its value?
• What will it cost to insure?
• What are its gas-mileage projections?

And, above all: Can I Afford it?

To work out the last — and most important — of these considerations, we’ve provided an auto loan calculator. It offers everything you need to pinpoint your ballpark payment schedule, based on four variables:

1. Down Payment
2. Desired Monthly Payment
3. Annual Interest Rate
4. Length of Loan (in months)

Auto Loan Calculator

Let’s consider each category individually.

Vehicle Down payment

This is the amount you will apply toward the purchase price to reduce the amount financed. A down payment can include any combination of cash, trade-in or — when available — a dealer or manufacturer rebate.

Use online sites to help provide an idea of your car’s trade-in value. Regarding the pricing guide, make sure to use the trade-in value and not the retail cost (the dealer’s resale price).

Pro tip

Be brutally honest in assessing your vehicle. When in doubt, grade it down. That way you’ll be less dismayed by the report of the dealership’s used-car inspector. If it comes to that, you’ll also be in a better position to argue that the dealership’s appraisal is overly harsh.

The bigger the down payment, the better off you’ll be, for a number of reasons. Having lots of skin in the game allows you to shop for a better vehicle, or could lower your monthly payment, or could reduce the length of your loan (or all three). A fatter down payment can even lower the interest rate on your loan.

For new cars, which suffer notorious hits the moment they’re driven off the lot, a 20% down payment will prevent you from being “upside-down” — owing more than the car is worth — the instant you take possession.

Why is that important? If your car is stolen or totaled in the first couple of years of ownership, you could be on the hook for the difference between what insurance is willing to pay and what is remaining on you loan.

If you’re not that sort of risk-taker, the alternative would be gap insurance, purchased through your regular insurance agent. Be wary of buying gap insurance from dealers, who not only add breathtaking markups on the stuff, but will roll it into your loan so you end up paying interest on it.

Desired Monthly Payment

With serious consideration given to the length of the loan or lease, of course, the desired monthly payment is pretty much the total ballgame. It is the figure the dealership will target. It is the number that will be a fixed point in your financial world for the life of the loan or lease.

Things to consider beyond the monthly check you’ll stroke (or have automatically deducted) that are very much part of your auto-owning experience are the costs for insurance, gasoline, maintenance, fees, tolls and parking.

Generally, financial advisors advise against total vehicle costs topping 20% of take-home pay. Payments themselves, whether principle and interest or lease installments — but not insurance — should account for half that, or 10%.

Now, about insurance. Your premium will constitute a substantial portion of your car-owning costs. As with all consumer products, you should shop around. Begin by knowing your state’s minimum requirements, as well as those of the financing or leasing agency.

Review your driving record. Are there problems that can be cleaned up? What’s your current coverage? Does it require adjusting?

To cut to the chase, check out edmunds.com’s “How Much Car Insurance Do You Need.”

For estimates, submit “shop car insurance quotes” to your favorite search engine. Esurance, Edmunds, Money Supermarket and NetQuote are among the top providers.

Annual Interest Rate

As with most loans, your credit score and credit history will influence how low your interest rate will be.

Other factors include the length of the loan (longer terms tend to command higher rates, because the lender is at risk for a longer time), the type of lender — bank, credit union, automaker’s financing arm — and whether you’re buying new or used. New cars traditionally can be financed at lower rates.

Term of the Loan

It ought to go without saying that the shorter the length of your vehicle loan, the better. Yes, all other variables being equal, the longer you take to pay, the lower the monthly payments will be.

But other important factors to consider are the amount you’ll pay in interest on longer-term loans, how long you’ll be paying off your vehicle after its warranty runs out, and, because of depreciation, how long your loan balance will be higher than the value of the car.

Buying vs. Leasing: Generally, it costs more to buy a car than to lease one, but the upside is at the end of the purchase arrangement, you own something. At the least, if you’ve followed prudent advice on down payments and length of the loan, you will have equity in your vehicle if you get the new-car itch.

Leasing involves lower out-of-pocket monthly costs because you aren’t buying anything; you’re simply absorbing the vehicle’s depreciation during the term of the lease, plus interest (or rent) charges, taxes and fees.

Buying involves a down payment. Assorted upfront leasing costs can include the first month’s payment, a refundable security deposit, an acquisition fee, a down payment (for lower payments), taxes, registration, and other fees.

ConsumerReports.org details other differences, but they all orbit a central theme: One way the vehicle is yours; the other way it still belongs to the dealership.

Buy, and the vehicle is yours, to have, hold, drive, customize and, ultimately, dispose of as you see fit.

Lease, and you have to return it essentially as you received it, plus allowable mileage. Think of it as getting a car from Hertz or National, just for a really, really long weekend.

How Much Car Can I Afford?

As we have described in the previous sections, there is much that goes into deciding how much vehicle you can afford. Down payment. Savings. Available monthly cashflow. Potential for increasing your income. Other expenses.

Auto Financing Rule of Thumb: 20/4/10 formula

The closest thing to magic sauce is the 20/4/10 formula endorsed by many advisers: 20% down, no longer than a four-year term, and total vehicle expenses of 10%. This is prudent, happy-life advice.

Plug those numbers into our calculator, and you will get a good idea of how much vehicle you can maintain.