How much should you spend on a car?

You can determine how much to spend on a car based on you’re your debt-to-income ratio. Be sure to figure this out before you go online or visit any car dealers. Knowing how much you can pay will help you make a wise decision.

To determine your debt-to-income ratio, add up all your monthly credit payments such as current car payments and credit cards. Don’t include your living expense, like mortgage or utilities. Divide the total by your monthly take-home pay. The percentage is your debt-to-income ratio.

Many financial experts say that you should keep your debt-to-income ratio below 15 percent. So, if you have a ratio of 16 percent or more, consider paying off some of your credit card bills before you get a car payment. You can obtain a loan if you debt-ratio is less than 20 percent, but that 5 percent difference can matter tremendously if disaster strikes.

Remember there are more costs for your vehicle that you will also be responsible for – insurance and maintenance. With fuel prices reaching record levels, gas is a big expense for most vehicle owners. These expenses aren’t listed on your credit report or figured into your debt-to-income ratio. They can easily gobble up several hundred dollars a month.

You can figure out how a car payment will affect your lifestyle by totaling up all of your living expenses. Add all of the fees you pay each annually or quarterly, like insurance, health club memberships and Christmas expenses. Divide this sum by 12. Then add the amount to your monthly installment credit expenses that you figured for your debt-to-income ratio. Subtract the grand total from your monthly take-home pay. What you have left is how much of a car payment you can afford.