How much should I spend on an auto loan?

Piggy bank calculating auto loans
Whether a borrower is a freshly-licensed 16 years old with a minimum wage paying job or a seasoned automobile buff making substantial sums of money, a question any fiscally-minded individual should ask themselves is, “What can I afford?”

The unfortunate answer to this question is that it depends. It depends on a variety of circumstances, each beginning with a prospective auto loan borrower’s monthly income. Then depending on how that income is allotted amongst their needs, wants, and savings throughout the month, the borrower should be able to determine how much he or she can responsibly afford.

Make a Budget

Coming up with a healthy budget is the first step to determining affordability. If a borrower takes his monthly income (or his combined with his spouse’s), then writes down how much he spends on his needs, wants, and savings, he should hopefully have some money left over. Borrowers cannot begin looking for auto loans when they’re insolvent.

Many financial experts feel a good ratio for spending is 50/30/20—50 percent for needs, 30 percent for wants, and 20 percent for savings.

Needs include everything from food, shelter, and medicine to insurance, cell phone plans, and outstanding expenditures (home, student, and existing auto loans, for instance)—the things most of us must have (or must pay off) in today’s fast-paced society.

Wants are everything we love, but can do without: entertainment, fine dining, and extra clothing to name a few.

Finally, everybody—regardless of who they are—ought to put some money away in savings.

Dissect the Leftovers

After evaluating what one spends, they can then subtract that amount from the total they have allocated to each category.

If borrowers are sticking to a 50/30/20 plan, and if they find they only spend 40 percent of their income on needs and 25 percent on their wants, then they can add the remaining, leftover money together.

The total leftover money from the needs and wants is the number that prospective borrowers can safely put towards new auto loans.