Knowing how much car you can afford can help you make a more prudent decision when it comes to getting an auto loan. Whether or not you get a car loan pre-approval, you should still sit down and figure out how much car you can afford. When one figures this out, it is important to figure out the car affordability in terms of monthly payments. You should do the math to determine how much you can afford to pay each month on a car payment, and then make sure that you purchase a car that fits within that framework. In fact, if you tell most dealers how much you want your monthly payment to be, they can usually help you find a car that works for you.

What your monthly car loan payment includes

A monthly auto loan payment is not just about dividing up the purchase price. There are other factors to consider when figure out a monthly auto loan payment. Here are some of the things that can be added to your loan and can increase the monthly payment:

• Interest rate charges
• Loan origination fees
• Costs of registration
• Taxes
• Title fees

As you can see, your loan encompasses more than just the purchase price, and this will affect your monthly car loan payments.

How much you can afford

There is a rule of thumb regarding how much of your monthly income should go to making car payments. This rule is generally acknowledged to be no more than 20 percent of your net (take home) monthly income. And this rule applies to all car payments together. So if you have three cars, the total of the payments on the car loans should not exceed 20 percent of your income. This is because cars are not a particularly good investment, and you will be more financially solvent if you limit how much car you buy — and you will be less likely to default on your car loan.