What's a desirable amount for a car loan?

I’m shopping around for a car, but I’m not exactly sure how much to borrow for a car loan. Is there a formula or rule for determining your budget? What’s a typical car loan amount?

Answer
When you’re buying a car, budgeting is essential. You don’t want to pay too much for a car, and you don’t want the monthly payments on a car loan to stymie your financial plan or emergency funds.
So if you’re wondering how much car you can afford, most financial experts suggest the 20/4/10 rule. This rule states that the car you buy should meet these criteria:
  • You’re able to comfortably make a down payment of 20%
  • Your loan length is no longer than four years or 48 months
  • You aren’t spending more than 10% of your pre-tax income on payments in a year
To put this in perspective, consider the following example. If you make $60,000 per year pre-tax, your yearly payments should add up to no more than $6,000, or $500 a month, with a 48-month loan.
Let’s also assume that you qualify for the national average for a 48-month loan, which is 3.88% APR. If you put all of that information together, you can probably afford to borrow right around $30,000, assuming you put 20%, or $6,000, toward your down payment.
If you want to see how much a lender is willing to give you, shop around and get preapproval. Preapproval will show you how much your monthly payments will be and how much the lender is willing to let you borrow. Remember that you don’t have to spend every last dime that the bank offers!
And if you want to save even more money, shop around for car insurance, too. To make the process easier, check out the Jerry app.
As a licensed broker, Jerry can help you find and compare quotes from over 50 top providers in minutes. When you finally spy the perfect new car, Jerry will switch your insurance from the previous car and even cancel your old insurance for you. It’s just that easy.
Eric Schad
Answered on Nov 09, 2021
Eric Schad has been a freelance writer for nearly a decade, as well as an SEO specialist and editor for the past five years. Before getting behind the keyboard, he worked in the finance and music industries (the perfect combo). With a wide array of professional and personal experiences, he’s developed a knack for tone and branding across many different verticals. Away from the computer, Schad is a blues guitar shredder, crazed sports fan, and always down for a spontaneous trip anywhere around the globe.
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