How Much Car Can You Really Afford? (Car Loan Basics)

Owning a car is most likely the second most expensive thing in your entire life next to a house so it's probably a good idea that you make sure that you can actually afford the car that you're buying because they can get really expensive if you're not paying attention. So in this video I'm going to explain exactly how much car you can really afford with just some basic information and some basic math so that you guys can plug in your own numbers and find out for yourself if you can afford the car or if you can't. Now if you just found this channel I'm I make a lot of videos on different topics that will give your life and your finances more value so if you guys are interested in that type of content feel free to subscribe but for now let's just start talking about how much car you can really afford. Before I get into everything I want to quickly address some averages that I found online when it comes to car payments and car loans because these are the averages of what everybody else is paying and these are not very good numbers because everybody is apparently buying way too much car compared to the income that they're actually making. So according to some quick research I found that the average car loan is for about $30,000 with an interest rate of about 6% and then the average term is for about 66 months which is five and a half years and those are really bad numbers considering that the average household income in the US right now is $45,000 a year. So when you run those numbers on a loan calculator you'll actually find that the average car payment is going to be about $535 a month and that is extremely high when you consider like I just said the average US salary is just $45,000 a year. And then the part that bothers me the most about these terrible averages is that you're actually going to be paying about 5,300 bucks in interest on that loan and that is a lot of money just to be wasting on interest. Now I'm not opposed to having a car loan but I would prefer that you pay cash for your car but if you are going to get a loan just follow these three steps that I'm going to lay out right here and this is going to teach you exactly how much car you can afford according to just this basic information that I'm going to give you. Okay so the first step I want to talk about is the fact that you need at least 20% down on your car loan and this is going to prevent you from going upside down in your car most likely and then it's also going to help keep your payments a little bit lower because you have such a hefty down payment. And keep in mind that when you put 20% down on your car loan you're also most likely to get the best rates from the banks as well. So always make it a priority to put at least 20% down on your car. I know that's going to take a while to save up in some cases but it is something you definitely need to be doing. Now the next step is that you should only finance your car for a maximum of 60 months which is going to be five years and I don't want you doing anything higher than that. So if you're looking at a 72 or an 84 month loan do not do those loans. Only stick with 60 months or lower and I would prefer it if you guys could stick with about a 36 to a 48 month loan. That way you can get your car paid off a lot faster but at the most just stick with 60 months or less and you're good to go. And also when it comes to the length of the loan pay attention to the interest rate as well because if you're looking at a 60 month loan with a 5% interest rate but then you look at a 36 month loan and it has a 3.5% rate then for sure try to go with a 3.5% rate with the different term because that's going to save you a lot of money on interest and that's going to be a better value for you overall. Now the last step is that your total associated car payment shouldn't exceed 10% of your net take-home pay and I'll explain how that works right here. So if you make $35,000 a year after taxes then just take that money and divide it by 12 months and you're going to get $2,900 a month and that's how much money you have coming in. So that means that 10% of that is going to be $290 a month that you can use towards a car payment but just make sure that you're also including all the associated car costs as well because those need to be included in the 10%. So if you've got car insurance, registration, maintenance and all that other kind of stuff associated with owning the car then for sure add that in as part of the 10% of your net income because that is associated with owning the car. So if you added up all of the associated costs and let's say that they added up to $100 a month then if you are only allowed to have $290 as part of your car payment then your car payment needs to be $190 and then your associated cost would be $100 and that would be what you can actually afford based on the $35,000 net salary. Now if you guys have made it this far into the video can you please just give it a big thumbs up if you're what I'm talking about that way I can actually tell if I need to make more content like this or not. So thank you very much. Now let's go for an example here so that I can show you guys the three steps in action so that you can make sense of everything that I've just talked about. So for example let's say that Joe wants to buy a $20,000 car and he makes $50,000 a year net and then he's going to get a 4% interest rate from the credit union because he has good credit. Well the first he's going to need to do is come up with 20% down which is going to be $4,000. So he's going to end up financing $16,000 at 4% interest and then let's do a 60 month loan and that is going to make his payment about $300 a month. Now his net income of $50,000 is going to bring him in $4,166 per month so that means he can afford a $416 total car payment and remember that's including all of the associated car costs as well. So if 10% of his take-home pay is $416 a month and his car payment is looking to be about $300 a month then as long as the associated costs are about $100 then I could say that he can afford that car and he should go ahead and do it. So just remember the three steps which are that you need 20% down and then don't ever exceed 60 months as a car loan and then just make sure that you're only spending about 10% of your net income as far as all of your associated car costs go including the car payment and all of the other things and as long as you're not exceeding 10% then just run those same numbers and you can find out if you can afford the car or not. Cars are always going to be depreciating assets so just remember that you always want to get the best value when you're buying them and when you're financing them so that you don't end up spending all of your money on a stupid car that's just losing money because that's just inevitable. Once again I'm Jason with Honest Finance and I make a lot of videos on different topics that will give your life and your finances more value so if you guys do find an interest in that type of content feel free to subscribe but for now I'm just going to put up some other car loan videos that you guys can learn about the math side of things you guys can watch those or just move on but thank you for your time.