How much car can I afford?

How much car can I afford?

The answer to this question is “As low as possible.” In fact, it may be way less than you think, until and unless you are absolutely passionate about cars.

Basically, saving money means saving for the three biggest expenses in your life i.e. your higher education, your house, and your car.

If you spend more than you can afford on your Education loan, Home loan and car payment then those huge bills will eat into your savings, making it harder for you to grow wealthy through investing.

Most economical people spend as little as possible on their car. They buy a used or a low-cost new car, drive it as much as possible and own just one car instead of two or three.

If they can pay for it, they have it.

So how much car can I afford?

How can I get the desired car that makes me happy without breaking my monthly budget?

The answer to this question depends on your:

  • Discretionary income (Take home Salary minus all payments i.e. expenses, investments, and other EMIs)
  • Selection of the right car as per your desire or requirements

AutoWagons Thumb Rule

  • (50-60) % of your Annual Discretionary income if paying in Cash upfront, or
  • (30-40) % of your Monthly Discretionary income if paying through EMI by availing Car Loan

As a thumb rule, we would suggest considering 50% to 60% of your Annual Discretionary income (i.e. Annual Take Home Salary minus Annual payments i.e. Expenses, investments, and other EMIs) as your overall car price, if you are planning to buy your car through upfront cash payment.

There are some calculators available in the market which calculates affordability of an individual to buy a car. They do this solely on the basis of “Annual Salary” or “Monthly Salary”, not taking into account lifestyle and other expenses which may lead to inaccurate estimates.

We, at Autowagons, have found that it is imperative to take into consideration annual expenses and other deductions like:

  • House Rent
  • Travel Expenses
  • Food and Lifestyle expenses
  • Investments
  • Others such as EMI, etc.
Upfront Cash Payment

If we take an example of a person earning $1,000 and spending $500 per month, his Monthly Discretionary Income would be $500. That makes his Annual Discretionary income $6,000. Hence, as per Autowagons thumb rule, it is advisable for him to buy a car ranging between $3,000 – $3,600 (which is 50-60% of $6,000).

Although this amount will not suffice to buy a new car, it is still good enough to buy an older, yet a reliable used car. Also, the buyer need not worry about availing car loan for this kind of price range.

On the other hand, someone earning $2,000 per month and spending $1,000 per month (i.e. Monthly Discretionary Income of $1000) can buy a car within a price range of $6,000 to $7,200, as per our thumb rule. This amount offers a choice among a wide range of brand new cars.

However, this person with a monthly discretionary income of $1,000 might still not be content if he desires to buy a well-equipped Honda City worth $20,000. He might think of alternatives like financing his car by taking a Car loan. So, what should be the EMI and tenure for buying this car?

Car Loan

Based on thorough research, we suggest that your EMI should be 30% to 40% of your Monthly Discretionary Income.

In continuation with the above example of a person having monthly discretionary income of $1,000, he can afford to pay $300- $400 as EMI for Car Loan.

If he considers paying EMI of $300 under the rate of interest of 8%, he can afford a higher priced car based on increasing tenure.

  • If tenure is 3 years, Principal Loan amount can be $9,574
  • If tenure is 5 years, Principal Loan amount can be $14,796
  • If tenure is 7.5 years, Principal Loan amount can be $20,254. This is what was needed!

Use our car affordability calculator now!

Three Life Choices

The importance of owning a car varies from person to person and only you can decide which choice is right for you. Whether you’ll pay cash, take a loan or invest, it all depends on how important buying a car is to you compared to other expenses.

That is why it’s important to break the above thumb rule into three different life choices-

  • Some people want to own a car for occasional use.
  • Others want a reliable car that takes care of their routine activities.
  • And rest are car aficionados who are willing to pay any amount for the car they love.

Let’s take a look at these choices one by one and the kind of money they should spend to buy a car.

The Economical Choice

  • (30-40) % of your Annual Discretionary income if paying in Cash upfront, or
  • (20-30) % of your Monthly Discretionary income if paying through EMI by availing Car Loan

Some people need a car for an occasional getaway or a vacation. With their minimal requirements, they opt for a car that is just satiable.

Upfront Cash Payment

We would suggest considering 30% to 40% of Annual Discretionary income as overall car price if planning to buy a car by paying cash upfront.

Again, considering the above example: a person earning $2000 and spending $1000 per month can buy a car in the price range of $3600 to $4800. If you earn $2000 per month, then you can easily buy a used car within this price range. Clearly, this is the bitter reality of being economical when it comes to money.

Car Loan

For those people who would like to avail a Car Loan, we would suggest that EMI should be 10% to 20% of the Monthly Discretionary income.

So, a person having a monthly discretionary income of $1,000 can pay $200-$300 as EMI for Car Loan.

If you consider paying EMI of $200 under the rate of interest of 8%, you can afford a higher priced car based on increasing tenure.

  • If tenure is 3 years, Principal Loan amount can be $6,382
  • If tenure is 5 years, Principal Loan amount can be $9,864
  • If tenure is 7.5 years, Principal Loan amount can be $13,503

But since people usually enjoy driving and pampering their cars, they would be willing to spend more, which brings us to our second choice.

The Reliable Choice (or the Thumb rule)

  • (50-60) % of your Annual Discretionary income if paying in Cash upfront, or
  • (30-40) % of your Monthly Discretionary income if paying through EMI by availing Car Loan

There are people who look for features such as reliability and safety in a car and that takes care of their day to day tasks like commuting to and from office, grocery shopping, picking kids from school, etc. 

Up-front Cash Payment

We would suggest considering 50% to 60% of Annual Discretionary income as overall car price if planning to buy a car by paying cash upfront.

Taking the above example: a person earning $2,000 and spending $1000 per month can buy a car in the price range of $6,000 to $7,200. If you earn $2000 per month, you can easily get any decent car within this range.

Car Loan

For those people who would like to avail a Car Loan, we would suggest that EMI should be 30% to 40% of the Monthly Discretionary income.

So, a person having a monthly discretionary income of $1,000 can pay $300-$400 as EMI for Car Loan.

If you consider paying EMI of $300 under the rate of interest of 8%, you can afford a higher priced car based on increasing tenure.

  • If tenure is 3 years, Principal Loan amount can be ₹5,74,412 ($9,574)
  • If tenure is 5 years, Principal Loan amount can be ₹8,87,731 ($14,796)
  • If tenure is 7.5 years, Principal Loan amount can be ₹12,15,255. ($20,254)

To most of our readers, this probably sounds good so far. But if you enjoy driving the best Car around town and willing to spend a lot more, the next choice is for you.

The Dream Choice

  • (80-90) % of your Annual Discretionary income if paying in Cash upfront
  • (50-60) % of your Monthly Discretionary income if paying by Car Loan through EMI

If “I would never be able to get my dream car with that kind of money” is what is on your mind, then keep on reading.

Upfront Cash Payment

You can spend 80–90% (or even more!) of your Annual Discretionary income to buy your dream car upfront (if you can).

A person earning $2,000 and spending $1,000 per month can buy a car in the price range of $9,600 to $10,800.

But this would still not be sufficient for people aiming for high-end luxury cars. So, they are more susceptible to opt for Car Loans.

Car Loan

These people would pay for EMIs that is 50-60% of their Monthly Discretionary income. There is a good chance that Banks or other NBFCs would not allow for EMIs beyond a certain point.

Once again, a person having a monthly discretionary income of $1,000 can pay $500-$600 as EMI for Car Loan.

If you consider paying EMI of $600 under the rate of interest of 8%, you can afford a higher priced car based on increasing tenure.

  • If tenure is 3 years, Principal Loan amount can be $19,147
  • If tenure is 5 years, Principal Loan amount can be $29,591
  • If tenure is 7.5 years, Principal Loan amount can be $40,508.5

If you fall in the last category, you should ask yourself these basic questions:

  • Are you influenced by advertising, culture, self-esteem or other such reasons that make you vulnerable to spend a fortune on a car that burns a hole in your pocket?, or
  • Is it because you’re a “car enthusiast” and you believe every money spent on your dream car is worth any other expense in life?

In case of latter, there’s nothing wrong in spending on things you value the most, no matter how high the expenses are. That said, as a “car enthusiast”, you would take a good amount of care of it while enjoying its ride to the fullest, ensuring you get better resale value when you sell it.

“How much car can I afford?” vs “How much can be borrowed to buy a Car?”

Please note that it’s not necessary that if you can afford a car loan as per the above guidelines, then you would easily get the same principal amount by the bank.

If the bank does not find you eligible, your car loan may not be sanctioned. This will depend on several factors including but not limited to:

  • Your credit score, which will determine your annual percentage rate (APR)
  • Your loan tenure
  • Buying new or used car (new car loans tend to have lower APRs)

Conclusion

A salesperson can sell almost any car to a customer if the buyer did not clearly think about his choices and budget. This may lead to poor decisions that would be regretted later.

So, if you’re not a car lover or an enthusiast, then you should think about why you should spend so much on a car.

Trust me, it’s better not to regret later!

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8 thoughts on “How much car can I afford?

  • March 21, 2019 at 8:28 am
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    Hey, Thank you for taking the time to write this. I have to start blogging again soon ugh.

    Reply
    • March 24, 2019 at 1:08 pm
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      Thanks Nelia!

      Reply
  • March 21, 2019 at 10:57 am
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    An interesting discussion is worth comment. I think that you should write more on this topic, it might not be a taboo subject but generally people are not enough to speak on such topics. To the next. Cheers

    Reply
    • March 24, 2019 at 1:07 pm
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      Thanks Rory!
      You could always suggest topics of your interest. Our team would be happy to help you!

      Reply
  • July 24, 2019 at 9:21 am
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    Reply
  • August 27, 2019 at 11:04 am
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  • September 15, 2019 at 4:35 pm
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    Reply

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