What Percentage of Your Income Should You Use For Your Car Payment?

According to Experian, an average new car payment is $742 these days — which can eat up a significant portion of your monthly budget. But knowing how much your car payment should be isn’t always simple. A lot depends on your income and other expenses. 

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That’s why it’s helpful to have guidelines, so you know if you’re on the right track. Many experts recommend spending no more than 10% to 15% of your monthly income on car-related expenses, including auto loan payments, gas and insurance.

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Read on for tips on calculating how much you should spend, plus ways to lower your car payment if you think it’s too high.

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What determines your car payment

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The first thing to understand is how much your car payment should be based on your vehicle and loan amount. Larger loans with higher rates have bigger payments, while smaller loans with lower rates have smaller payments.

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Several different factors influence your auto loan (and the resulting payment), including:

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• Vehicle price: Higher prices mean larger loans. The monthly payment for a $30,000 sedan will be lower than for a $80,000 full-size truck.
• Down payment: The larger your down payment, the less you have to borrow. A $15,000 down payment on a $30,000 car means you only have to borrow $15,000. However, if you put down $15,000 on a $80,000 vehicle, you still have to borrow $65,000.
• Interest rate: A higher interest rate increases your monthly payment amount. Average car loan rates are lower for those with good credit.
• Length of term: Stretching your loan over a long period of time can make your monthly payments smaller, but it will also cost you more in interest overall.
• Loan fees: The origination fee and other fees added to your loan will increase your loan amount and the monthly payment.

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How much should your car payment be?

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Your car payment should fit your budget comfortably and leave room for necessities, savings and debt repayment. A good rule of thumb is to keep your vehicle expenses below 10% to 15% of your income. 

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For example, the average salary is $5,460 per month, according to the U.S. Bureau of Labor Statistics, so a good car payment for that income would be between $546 and $819. 

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Review the table below for an estimate of what your car payment would be if you were to stick to the 10% to 15% rule of thumb.

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Keep in mind that these are a suggested range only. Your car payment should also take into account your other debt obligations, such as a mortgage, personal loan, student loans or credit card payments. The more of your income you must use to pay other expenses, the less you’ll have left over for your car payment. 

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Strategies to lower your monthly car payment

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If your car payment is putting pressure on your budget, there are several ways you can lower it — both before and after you buy.

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Before you buy a car

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If you haven’t signed the car loan yet, use these strategies to minimize your monthly payment:

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• Increase your down payment: It could be worth saving up a little longer if it helps you secure a lower monthly payment.
• Secure a lower interest rate: You’re more likely to get a lower interest rate with good credit, a big down payment and a new vs. used car.
• Choose a more affordable vehicle: Look for a balance between features, safety and price. Lower prices generally mean lower payments.
• Shop for a deal: Car dealers often run promotions to attract new customers, whether it’s a great price, a low rate or a bonus on your trade.

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If you already have a car loan

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Sometimes you only realize your car payment is too high after you’ve signed the loan. If that’s your experience, you may want to:

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• Refinance: Refinancing a car loan is a common way to get a lower monthly payment. When you refinance, you keep your car but replace your existing auto loan with a new one that has better terms.
• Downsize: It could be time to trade in your current vehicle for a less expensive option. Keep in mind that trading in your car could mean rolling over the balance of your auto loan, which may cost you more in interest in the long run.

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Will lowering my car payment do any good?

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Managing your finances is a matter of balance. Lowering your car payment can do plenty of good if it frees up cash flow for your other priorities like reducing credit card debt or building savings. 

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If your car payment is above 15% of your monthly income, consider what steps you can take to lower it. Just note that there are tradeoffs to different strategies for lowering your car payment, which can result in paying more overall in interest.

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Before you make moves to change your car payment, take some time to review your budget and financial goals. Consider what works best for your finances not only today, but in the long term as well.

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FAQs

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Below are answers to some common questions about how much your car payment should be.

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How much should my car payment be based on my income?

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Aim to keep your car payment at or below 15% of your monthly income. For example, if your take-home pay is $6,000 per month, keep your car payment between $600 and $900 — or lower if you can manage it.

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Does my credit score affect how much my car payment will be?

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Yes, your credit score is one of the factors influencing your car payment. That’s because auto lenders use your credit score to help determine your interest rate. They reserve their lowest interest rates for borrowers with excellent credit. If you have a low credit score, you might receive a higher interest rate.

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Can I refinance my car to decrease my monthly payments?

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Yes, you can absolutely refinance your car to lower your monthly payment. In fact, refinancing is a common way to get a new loan that works better for your needs, whether it’s by reducing your monthly payment, lowering your interest rate, extending your loan term or changing something else.

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How much should I put into my budget for insurance and estimated maintenance?

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It’s very wise to include insurance and repairs when budgeting for vehicle expenses. The average car owner spends $1,452 per year on upkeep according to AAA, so setting aside an extra $100+ per month is a good start. According to the Insurance Information Institute, the average cost of car insurance is $1,588 annually. Consider adding another $100 to $200 to your monthly budget for insurance. Review your vehicle’s exact insurance premiums and estimated repairs to get a better idea of what you should budget.

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