Any person planning to buy a car must determine whether they can afford the monthly payments based on their income. They need to assess their financial situation to avoid overextending their budget. How can they calculate their car loan in relation to their monthly income? 

Monthly Income and Expenses

A person cannot determine their financial situation until they sit down and list their income and monthly expenses. Income includes funds from salaries, freelance work, government payments, and investments. Expenses are the money spent on any purpose. People often overlook discretionary spending, which can ultimately harm them over time. Subtract the expenses from the income to determine how much is left for a car payment. Financial experts recommend keeping the car payment and associated fees below 20 percent of the monthly disposable income. 

Car Loan Calculators

Once this figure has been determined, many people turn to a car loan calculator to determine the monthly payments for a car they wish to buy. To use the calculator, they enter the loan amount, interest rate, and loan term to determine their monthly car payment. Include the down payment to see how it affects the price. Experiment with different interest rates to see how they impact the monthly payment and input various loan terms. People can easily see how small changes can make a car payment more affordable. 

Additional Costs

The monthly payment is only a portion of the cost of vehicle ownership. Individuals must consider other expenses associated with owning and operating a car. These expenses include insurance, fuel, maintenance, taxes, inspections, repairs, and registration fees. When a person includes these costs in the calculation, they can make certain the purchase will fit within their monthly disposable income while leaving room for unanticipated expenses. 

Loan Terms and Rates

Loan terms and rates often vary by lender and can affect the affordability of the car loan. People who choose a shorter loan term make higher monthly payments, but they pay less in interest over the life of the loan. A longer term leads to lower monthly payments, but interest charges increase. Lenders determine the interest rate based on the borrower’s credit score. A higher score leads to a more favorable rate, so a borrower might want to improve their credit score before applying for a loan. Additionally, borrowers should explore different lenders to find the best rates and terms. 

Down Payment

To save on monthly payments, a borrower might also increase their down payment. Doing so lowers the monthly fee and may result in a lower interest rate, as the lender assumes less risk. Financial experts recommend putting down a minimum of 20 percent of the car’s asking price. Not only will this keep interest costs down, but it also allows the buyer to avoid negative equity. Avoiding negative equity is important to ensure the remaining balance on the loan will be covered if the vehicle is totaled before the loan is paid in full. Another option is to purchase gap insurance, but this coverage adds to the cost of vehicle ownership. 

Debt-to-Income Ratio

The debt-to-income ratio is another factor lenders consider when evaluating an applicant.  Lenders prefer a debt-to-income ratio below 36 percent. Borrowers should also monitor this ratio to ensure their car loan won’t harm their financial health. 

People who follow these steps can determine whether their anticipated car loan is feasible. They need to ensure they can afford the car and all associated costs without harming their financial situation. Using a car loan calculator can help them make this determination.