How Much Should My Car Payment Be?

What Is the Total Cost of Owning a Car?

The average monthly payment is $742 for a new car loan and $525 for a used car loan, according to fourth-quarter (Q4) 2024 data from Experian's State of the Automotive Finance Market report.

However, the total cost of car ownership goes far beyond the monthly auto loan payment. Understanding the different expenses can help provide you with a better framework for determining your budget for a new vehicle. Other costs to keep in mind include:

• Insurance: Most states require a minimum amount of insurance coverage to legally drive, and with an outstanding auto loan, your lender will likely require you to add collision and comprehensive insurance.
• Fuel: Your fuel costs will vary depending on prevailing fuel prices, how much you drive and your vehicle's fuel efficiency. If you're planning to buy an electric vehicle, you can substitute electricity and charging station costs for fuel expenses.
• Maintenance and repairs: To keep your car running smoothly, it's wise to follow the manufacturer's maintenance schedule. As the vehicle gets older, however, you may also need to pay for various repairs to keep it in good condition.

If you live in an area with toll roads or parking fees, you'll also need to consider those costs.

How to Calculate an Affordable Car Payment

Depending on your financial situation, there are a couple of simple approaches you can take to determine how much car you can afford.

The first is the 10% to 15% rule. For this, simply multiply your take-home pay by 0.10 and 0.15 to get a range of affordability for all transportation costs. For example, if your net pay is $5,000 per month, you'd have a range of $500 to $750.

Alternatively, you could use the 50/30/20 budgeting method as a benchmark. This approach involves putting 50% of your take-home pay toward necessities (including transportation costs), 30% for discretionary spending and 20% for savings.

So, with a $5,000 net income, you'd want to put no more than $2,500 toward necessary expenses each month. If tallying up your other basic expenses gives you a sum of $2,000, you'd have $500 left over for transportation expenses. If your other bills come up to $1,600, however, you'd have up to $900 to put toward an auto loan and other vehicle-related expenses.

How Are Car Payments Determined?

Lenders determine your monthly payment based on a few factors, including the loan amount, the repayment term and your interest rate.

• Loan amount: This is the total amount you're borrowing, which you'll need to pay back over the course of your loan's term.
• Repayment term: Auto loan terms typically range from 24 to 84 months, with longer repayment terms resulting in lower payments.
• Interest rate: Your auto loan's interest rate—often reflected as your annual percentage rate (APR)—is determined based on your creditworthiness, economic factors and other factors.

To give you an idea of how different loan terms can affect your monthly payment, here are a few examples for a $20,000 car loan:

To get a good sense of what your payment might look like, consider using an online car payment calculator.

Learn more: What's the Average Length of a Car Loan?

How to Lower Your Car Payment

There are many steps you can take to reduce your monthly car payment. Here are some tips to help you get started:

• Buy a used car. Used cars often cost much less than new vehicles, which means that your payments may be lower, depending on your interest rate. Used cars also may help you save on insurance, as the cost of repairs or replacement may be lower compared to new cars.
• Make a larger down payment. Consider saving for a few extra months so you can beef up your down payment when going to buy a car. Every extra dollar you pay in your down payment is one less that you'll have to finance and pay interest on over time.
• Consider a lease. Car leases often have lower monthly payments than car loans. That said, lease agreements typically set a mileage limit and may have maintenance requirements, so make sure to run the numbers and look into all the details beforehand. Also, keep in mind that while a lease may lower your monthly payments in the short term, you'll pay more in the long run because you will always have a monthly car payment.
• Choose a longer repayment term. A longer repayment term can reduce your monthly payment because you're paying off the loan over a longer period of time. Note, however, that a longer term will also result in more total interest charges. So, consider this option only if your financial situation makes it impossible to opt for a shorter term.
• Improve your credit. Interest rates are often based on creditworthiness. Improving your credit score before going car shopping may help you get a better interest rate which will save you money over the course of your loan.

You can also look into ways to reduce your other transportation costs. For example, carpooling can help reduce your fuel costs, keeping up with maintenance can prevent costly repairs and shopping around for car insurance can help you secure the cheapest rates.

Prioritize Your Credit Before Applying for an Auto Loan

It's a good idea to evaluate your creditworthiness long before you start the car-buying process. With Experian, you can get free access to your Experian credit report and FICO^® Score^☉, both of which can give you key information about your credit health, as well as insights into how you can improve your credit.

If your score needs some work, take steps to increase it before you apply for a loan. Also, continue to monitor your credit throughout the loan process and afterward to maintain a good credit score going forward.