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How to Calculate an Affordable Car Payment Based on Your Income

Shopping for a new or used car goes a little beyond just picking out the right car for you and your family. You also need to figure out how you are going to pay for it if you can’t afford the whole cost of it in one lump sum, and in that regard, how much of a monthly car payment you can comfortably afford. Here is how to calculate an affordable car payment based on your annual income.

How much car can I afford?

If you’re trying to figure out just how much of a car that you can afford, then a good general rule of thumb is to spend around 35% of your annual income (before taxes). However, since your personal finances can vary greatly depending on how much you pay for housing, food, etc., then another way to figure it out is to use Ari Janessian’s (a YouTuber and auto broker) way of calculating how much of a car that you can afford.

According to Janessian, the average yearly income in the U.S. is $50,000 per year, the average lease payment is $450/month, and the average finance payment is $575/month. So to get the average car payment amount that you could afford if you were leasing, then you divide 450 by 50,000, which equals 0.009. For financing, it would be 575 divided by 50,000, which equals 0.0115.

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As a result, if you want to figure out how much of a monthly payment you should be paying for a leased car, then you would multiply your annual income (before taxes) by .009, and if you want to finance the car, then multiply your annual income by .0115.

For example, if you make $50,000 per year, then you would want to keep your lease payment for a new car at or below $450/month, and if you’re financing the vehicle then you want to be at or below $575/month.

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There’s an easier way to calculate your monthly car payment

While Janessian’s method of calculating how much of a monthly payment you can afford is pretty solid, the numbers could be a little high depending on your current financial situation. However, keep in mind that his calculations are based on the average amount that the typical car buyer pays in the U.S., which means that your mileage may vary.

If you want an easier way to calculate the monthly payment, then we would suggest using one of the many calculators available online. A good one is a calculator from Nerd Wallet, in which you plug in your desired monthly payment and your credit tier in order to figure out a rough estimate of the total car price that you can afford. Nerd Wallet also recommends that in order to calculate an ideal monthly payment, simply take 10% of your monthly income amount (after taxes) and use that as an ideal car payment.

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For example, if you make $3,000 after taxes, then you’ll want to keep your monthly payment ideally at around $300 per month or less. This is a pretty realistic way of calculating a comfortable monthly payment that you can afford since you’ll be able to better fit the monthly payment in with your other expenses.