If you’re looking to buy a car in 2025, you’re likely facing high interest rates and long waiting lists. The current market makes it crucial to avoid overextending yourself by committing to a car that is beyond your financial reach. The last thing you want is to become “car poor,” a term defined by Urban Dictionary as having an excessively high car payment that prevents you from enjoying anything else and leaves you with little more than instant noodles for dinner.

In other words, car poor means your car payments are so crazy high that they consume most of your income. At the end of the day (or the month) you end up with barely any money left to afford anything else or struggling to cover your basic expenses.

Walking into a dealership without a clear budget plan can lead to being overwhelmed by fancy options and tempting price tags. In this article, we’ll guide you through the process of calculating how much car you can realistically afford. Armed with this knowledge, you can confidently enter a dealership, knowing exactly what you can afford and making the right decision.

Also read: 9 Money Habits Keeping You Poor

5 Major Factors Affecting Monthly Car Payments

Unless you’re paying outright in cash, you’ll likely need financing, making monthly payments a significant factor in your purchase decision. Five major factors influence your monthly car payments:

1. Total Loan Amount: The smaller the loan amount, the lower your payments will be.

2. Interest Rates: Lower interest rates reduce your monthly payments.

3. Loan Term: A longer loan term lowers your monthly payments but increases the total interest paid over time.

4. Down Payment: A higher down payment decreases your monthly payments.

5. Credit History: A better credit history improves your chances of securing lower interest rates and better loan terms, ultimately reducing your payments.

Understanding these factors is essential when negotiating with a car dealer. A salesperson’s goal may be to manipulate these factors to make the monthly payments fit within your budget, regardless of whether the overall deal is beneficial for you.

3 Formulas to Keep in Mind

Financial experts recommend several benchmarks to help you determine how much you can afford to spend on a car. Here are three key rules:

1. The 35% Rule: This rule suggests that you should never spend more than 35% of your gross annual income on a car. For example, if your gross income is $70,000 per year, the car you purchase shouldn’t cost more than $24,500.

2. The 10/20 Rule: When it comes to monthly payments, this rule advises that you should spend no more than 10% of your take-home pay on a car loan payment and no more than 20% on total car expenses, including gas, insurance, repairs, and maintenance.

3. The 24/10 Rule: According to this formula, you should make a 20% down payment on a car, finance it with a 4-year loan, and spend no more than 10% of your monthly income on transportation expenses. In this case, the 10% refers to your gross income.

These rules can seem overwhelming, so I’ve simplified them into a step-by-step tutorial to help you calculate exactly how much car you can afford and avoid becoming car poor.

Calculate How Much Car You Can Afford

Step 1: Determine Your Affordable Car Price Let’s assume your gross income before taxes is $70,000. Based on the 35% rule, the maximum car price you should consider is $24,500.

Step 2: Calculate Your Down Payment and Financing Needs With the car priced at $24,500, the 24/10 rule recommends a 20% down payment, which would be $4,900. This leaves $19,600 to be financed.

Step 3: Establish the Loan Term For a $19,600 loan, the 24/10 rule suggests a 4-year loan term. This results in annual payments of $4,900.

Step 4: Calculate Loan Interest and Monthly Payments Assume an interest rate of 5% (though this will vary based on your credit score). With a 4-year loan term, your monthly payments would be $451.

Step 5: Break Down Your Annual Payments Of the $451 monthly payment, $454 is allocated to the principal and $877 to interest. Over 48 months, you would pay off the car in full.

Step 6: Determine Your After-Tax Monthly Income Your gross income of $70,000 translates to an after-tax income of approximately $53,723. This is the actual amount you’ll use to budget and allocate expenses.

Step 7: Estimate Total Car Usage Costs Assume $200 for insurance, $200 for gas, $100 for maintenance, and $50 for miscellaneous expenses. This totals $550 in additional monthly car costs.

Step 8: Perform a Sanity Check—Can You Really Afford It? The recommended 10% of your after-tax income for car payments is $448, while the calculated payment is $451—just $4 over. Similarly, your total car usage fees exceed the target by $102. If these overages are manageable within your budget, you may proceed. Otherwise, consider adjusting the car price, increasing the down payment, or finding ways to reduce other costs.

For your convenience here is a practical calculator to help you determine how much car you can afford.

So, What Car Should I Buy? New vs. Used

One of the key decisions that can determine whether you end up “car poor” is choosing between a new or used car. This decision can have significant implications on your finances, both immediately and in the long term.

While buying a used car often saves you money upfront, the benefits of a new car shouldn’t be dismissed. The answer to which is better depends on how you balance the immediate savings with long-term costs.

For instance, a new car typically loses about 30% of its value within the first year of ownership due to depreciation. If you buy a $30,000 new car and sell it after three years for $15,000, you’ve lost $15,000 to depreciation alone. On the other hand, if you buy a used car for $15,000 and sell it three years later for $10,000, you’ve only lost $5,000. This difference can significantly impact your overall financial health, especially if you’re trying to avoid becoming car poor.

However, used cars come with their own set of challenges, such as potentially higher maintenance costs and lower reliability, which can unexpectedly drain your finances. Despite these downsides, they usually come with lower insurance rates and registration costs, which can help keep your monthly expenses manageable.

New cars, in contrast, offer peace of mind with warranties, fewer maintenance concerns, and the latest features for comfort and safety. But these advantages come at a higher initial cost and quicker depreciation, both of which can contribute to being car poor if not carefully managed.

Ultimately, the choice between a new or used car should be made with a clear understanding of your financial situation. Consider whether the total cost of ownership aligns with your income and whether you’re prepared to handle the potential downsides of each option. For many, avoiding car-related debt and staying within a realistic budget is key to avoiding the pitfalls of being car poor.

Should You Get a Car Loan?

Financing a car is a reality for most people, with around 90% of all car purchases involving a loan. While loans can make it easier to afford a vehicle, they also increase the risk of becoming car poor if not managed wisely.

Before taking out a car loan, assess your overall debt level. Keep in mind that car loans, while common, should be approached with caution. It’s essential to understand the types of loans available, such as secured versus unsecured loans, and whether a fixed or variable interest rate is better for your situation.

The average car loan size is around $39,445, but many people opt for loans closer to $20,000 to avoid overextending their finances. The goal should be to keep your debt manageable and ensure that your car payments don’t push you into financial strain, which is a major contributor to becoming car poor.

If you do decide to take out a car loan, aim to minimize the amount you borrow. This strategy will help you reduce the upfront costs of purchasing a car while keeping your long-term financial health intact.

Also read: 9 Money Habits Keeping You Poor

Final Thoughts

Owning a car is convenient and time-saving, but it’s also a depreciating asset. It’s crucial to distinguish between a car you want and a car you can afford to avoid becoming car poor. By following these steps and using the provided formulas, you can make a smart financial decision.