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How much can you afford to spend?

Last updated: February 2013

You may already be dreaming of a new model that has caught your eye. Or of new features that will make your driving more pleasurable. But first you must face reality. And the first step in buying a new car should be to know what price range you can afford. To do this, you need two pieces of information:

Down payment. How much money can you pay up front in cash, with a trade-in, or both?

Monthly payment. If you plan to borrow money or to lease, what is the maximum car payment you can afford every month?

While it may be possible to find an auto loan that requires a low down payment, such as 5 percent, it is best to put down as much as you can afford—preferably at least 20 percent—to minimize your overall cost for the loan. A higher down payment reduces the amount of money you need to borrow, which lowers your monthly payments and reduces the amount of interest you’ll pay overall.

A down payment doesn’t have to be all cash. If you already have a car, any trade-in allowance the dealer gives you for it can be credited toward your down payment. Or you can sell it yourself, which will typically get you more money than trading it in. But you may need to do it before you buy your new car. Keep in mind that any cash rebates that are in effect when you buy can also be put toward the down payment.

To get a ballpark figure for the monthly payment, Consumer Reports’ financial experts recommend that your total debt payment be no more than 36 percent of your gross income. Going by this rule, you can use the following steps to calculate how much of your monthly income you can comfortably afford to put toward your auto payments:

Calculate what 36 percent of your gross monthly income is.
Itemize and total all your monthly payments, including your mortgage or rent, credit-card bills, and other installment loans.
Subtract the total of your monthly payments from the 36 percent figure.

For example, if your pretax income is $75,000, total debt payments should not exceed $27,000 a year. If your existing debt payments equal, say, $20,000 a year, you can afford to pay $7,000 annually, or $583 a month, for car payments.

By knowing your down payment and monthly payment, along with a typical interest rate and the number of years you’re willing to make car payments (the term of the loan), you can calculate the price of the vehicle that you can afford and the loan amount for which you’ll need to qualify. You can see what a typical interest rate is by calling your bank, credit union, or other lending institution, or check online to see prevailing rates at www.bankrate.com.

In order to run the numbers, use our free online car calculators.

In addition to the vehicle’s price, you also need to consider other costs, such as:

Sales tax
Registration fees
Insurance premiums

Taxes and registration fees can increase your out-of-pocket cost by as much as 10 percent or more, and driving a car that’s worth more than your current one will cost more to insure. Be sure to check with your insurance agent or get insurance quotes online so you understand what you’re getting into.

Once you know how much you can afford to spend, you can use our Ratings to see how vehicles in your price range have done in our tests.

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