Question: I’m looking at the paperwork for my car loan, and one of the sections is labeled desired loan amount. Should I just put the price of the car I’m buying?
Answer: The desired loan amount is the amount of money you need to borrow to pay for your vehicle. Note that this may not be the same as the list price for your car.
You’ll generally get the desired loan amount from the dealership or from a private seller, depending on where you’ll be buying your car.
- Used cars will usually have an exact price, particularly if you’re purchasing the vehicle directly from a private seller.
- New cars, on the other hand, often have extra fees attached to them, and you may be offered a loan directly from your dealership of choice.
While you can certainly purchase your vehicle entirely through your dealership, you may receive a significantly higher interest rate from a dealership than you would with a different lender.
What should you put for your desired loan amount?
When choosing your desired amount for your car loan, use the 20/4/10 rule. This rule states that the vehicle you choose is a financially safe choice if:
- You can make a down payment of 20%
- Your loan term length is four years (48 months) or less
- You’re spending a maximum of 10% of your pre-tax income on payments each year
Let’s take a closer look at some of these criteria
Use your income as a guide
The first thing to look at when determining your desired loan amount should be your income. Remember, car loans have interest attached to them, so you’ll be paying back more than the purchase price of your car (the “principal balance”). Monthly payments on your auto loan will go partially towards the interest on your loan.
This is where your income can be a helpful indicator. At most, your loan payments should be 10% of your monthly pre-tax income. If your income fluctuates throughout the year, the total cost of your loan each year should be about 10% of your annual income.
Factor in your down payment
Your down payment, or the amount of money you pay upfront for your car, should also be determined partially by your income. The payment amount should be at least 20% of the total cost of your car to keep your loan balance at a manageable level going forward.
Remember, the larger your down payment, the less you’ll need to pay in interest, meaning a lower car payment and/or a shorter loan repayment term. This will also look good on your credit history since you’ll have a better loan-to-value (LTV) ratio, meaning you pose a lower risk of bankruptcy.
Consider other costs during your repayment period
Picking a longer term for your loan may seem like a great idea since it means you’ll be paying lower car payments each month. However, the longer the life of the loan, the longer you’ll be accruing interest on the principal. The higher your annual percentage rate (that is, your interest rate plus any additional fees or charges from your lender), the more you’ll pay each month.
Your loan rates won’t be the only cost to think about, either. You’ll also need to make regular payments for things like car insurance if you want to drive your vehicle. Auto insurance can be very expensive for leased cars if you don’t shop around for affordable rates.
Liz Jenson is an insurance writer who specializes in general automotive and insurance topics. Liz’s mission is to produce informative and useful content to help car owners make smart choices when buying cars and car insurance. Since joining Jerry in 2021, Liz has written nearly 4,000 long- and short-form articles on topics including state-specific insurance recommendations, common car insurance questions, and deep dives into vehicle model details. Before they came to Jerry, Liz was a full-time student at Indiana University, Bloomington working on a double major in English and French.
Sarah Gray is an insurance writer with nearly a decade of experience in publishing and writing. Sarah specializes in writing articles that educate car owners and buyers on the full scope of car ownership—from shopping for and buying a new car to scrapping one that’s breathed its last and everything in between. Sarah has authored over 1,500 articles for Jerry on topics ranging from first-time buyer programs to how to get a salvage title for a totaled car. Prior to joining Jerry, Sarah was a full-time professor of English literature and composition with multiple academic writing publications.
Shannon Martin is a licensed insurance agent and insurance writer with 18 years of experience in the industry. She specializes in car, homeowners, and umbrella insurance and ensures readers can trust content for accuracy and usefulness. Prior to joining Jerry’s editorial team in 2021, Shannon was a founding member of Jerry’s customer response team, building on her 14 years of experience as an insurance professional at GEICO and The Hartford.
