We’ve all seen those late night commercials for car dealers; the ones that tell you whatever you want to hear.

“You only make $400 a month? How ’bout a new Escalade! We’ll help you swing it!”

Fortunately, you can find sensible recommendations on what you should be responsibly forking over in monthly payments for your car by doing a little internet research.

For example, Edmunds suggests not exceeding 20% of your take-home income for a car payment. And this makes sense, as most people pay rent or mortgage as the most significant percentage of their budget, leaving a much smaller chunk of income available for their vehicle. For an even more frugal view, we spoke with a financial consumer advocate.

“If a consumer’s only non-mortgage debt is an auto payment, the maximum percentage of gross income they could spend on a car is 8 to 15 percent,” stated Lee Ellingson, Director of Counseling at Consumer Credit Counseling Service. “The lower, the better.”

That figure is quite a bit lower than what a dealer would say, but the buyer is more likely to be able to swing this payment for the life of the loan. Ellingson said his numbers are more like guidelines, due to each person’s unique situation. “These actual amounts will vary from person to person, as each will have unique situations within their family budget.”

“The ideal way to pay for a car is to put aside the amount of the car payment each month until the purchaser is able to pay cash,” said Ellingson. That isn’t a possibility for many car buyers, but a common option is the longer term loan that brings down the monthly payment.

“The consumer should know they will pay more [for the car] by doing it this way.”

Ellingson goes on to say that you should absolutely never allow the term of the loan to run longer than the anticipated life of the car. For example, don’t take out a six-year loan on a 10-year old, high-mileage car.

However, he notes that if the question is longer term loan for lower payments, versus no car at all, then take the longer loan. Many buyers need a vehicle to get to work, and refusing a long term loan might mean loss of income. In that situation, the numbers make sense with the longer term loan.

How To Get The Payment You Want

With all that in mind, there are a few ways you can adjust the monthly payments to be within your budget.

  • Down payment – The more cash you put up for a down payment, the less you will owe on the vehicle, thus lowering your monthly payments.
  • Trade-in – If you have a trade-in vehicle, the amount that it is worth can be thought of as a down payment. A used up vehicle that the dealer thinks is only worth $1,000 is equal to $1,000 off the price of your new ride.
  • Pre-approved loan – The loan amount serves as a do-not-exceed limit, so you don’t get in over your head with excessive payments.

Ellingson said pre-approved loans let you know what you can afford and offer peace of mind, rather than another stressful step in the buying process.

With Carvana, we provide you with easy-to-use tools to help determine not only your loan, but your financing terms at large. Our soft pull financing feature allows you to completely personalize your financing terms in two minutes, and apply them to every vehicle in our inventory without taking a hit to your credit score. If you’re particularly interested in zeroing in on a loan amount for your next vehicle, our Auto Loan Calculator allows you to quickly and effectively discover exactly what it’ll take to purchase the vehicle you want. Want to compare interest rates on auto loans? Use our Auto Loan Comparison tool to see if the rate you’re being quoted is actually the best rate available for you!

At the end of the day, our goal is to provide you with the tools and information you need to make the most informed vehicle purchase possible.

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