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