Several factors impact how much car you can afford. It starts with your situation, your budget, and your vehicle needs. However, the transaction price for a new vehicle has been steadily on the rise, making new cars harder to afford.
In September 2025, the average transaction price (ATP) for a new vehicle topped $50,000 for the first time, according to Kelley Blue Book data. The ATP reached $50,080 for a new car, up 2.1% from August and 3.6% year-over-year. It had dropped a bit since, settling to an ATP of $49,814 in November, according to Cox Automotive data, reported by KBB. November's ATP was up 1.3% from 2024.
However, when December 2025 rolled around, the ATP for a new vehicle hit yet another high – $50,326, according to KBB estimates. This is up 1.1% from November, and 0.8% year-over-year.
Knowing that the average price of purchasing a vehicle is getting higher, it's important to know what you can afford before you start searching for a car. Lenders look at a lot of factors to see how big a loan they can approve you for, and you can do some calculations to ease your own concerns, too.
Here we will go over the factors that impact your auto loan, and what might ultimately influence car affordability.
Factors Influencing Car Affordability
Vehicle price is only one thing that impacts how affordable a car is, especially if you're using a loan to get it. Your interest rate, down payment amount, loan term, and credit score all play roles as well.
Additionally, you should look carefully at your monthly budget to see how much you can truly take on. Here's what you need to be aware of.
Income and Monthly Budget
Your income plays a huge role in how much you can afford to spend on a car – you shouldn't take out a loan you can't repay, buy a car you can't afford, or spend your total budget on just a car payment.
To make sure this doesn't happen, lenders look at your gross (pre-tax) monthly income and compare it to how much you spend on debts each month. They also compare your income to an estimated car loan payment and insurance costs to ensure it doesn't take up your entire budget.
These are called debt-to-income and payment-to-income ratios, and you can use them yourself to help shop for a loan within your budget. Calculating your DTI and PTI can truly help you see how much car you can afford. We'll break down these formulas in a moment.
Credit Score and Financing Terms
Your credit score is also a big part of the overall equation when it comes to how much you can afford for a car. This is because things like interest rates are determined by your credit score. The lower your credit score, the higher the interest rate you are likely to be charged on an auto loan.
This means that your loan can get expensive. According to the Experian State of the Automotive Market Report for the third quarter of 2025, the current average interest rates for auto loans run between 6.5% and 13.3%, depending on your credit score and the type of vehicle you're financing.
The higher your interest rate, the more it costs you to borrow money, and the more you will have to repay in the end.
Another thing that hinges on your credit score and overall interest rate is your loan term. Longer loans are available to help bring down the overall monthly cost when you have a higher interest rate, but the longer you take to repay your loan, the more interest you pay. It's a wise idea to keep your loan term as short as you can.
Total Cost of Ownership
The total cost of ownership is determined by many factors, on top of vehicle price and loan costs. These factors can vary depending on the vehicle, so be sure to do your research before you dive into an auto loan.
- Insurance Premiums: Insurance can be costly, and the price varies by vehicle. When you finance, you typically need to keep full-coverage insurance on the car to protect the lender's asset – the vehicle isn't yours until you pay off the loan. You're then free to drop to any level of insurance coverage as long as you meet your state's minimum requirements.
- Fuel Costs: Gas can be expensive depending on where you live, and prices can fluctuate greatly – the average fuel cost in the U.S. at the time of writing is around $2.85 a gallon. A small sedan or compact SUV may not require as much fuel as a larger vehicle, especially a truck or three-row SUV. If you drive a lot, you may want a car that sips fuel to lower your cost rather than an expensive gas-guzzler.
- Maintenance and Repairs: How much you spend each year on maintenance and repairs largely depends on your vehicle, as well as whether that vehicle is new or used. Older used cars tend to require more repairs, while newer vehicles may have maintenance costs you need to budget for. Keep in mind that costs and services required differ by vehicle type, gas or EV, but both require upkeep.
- Depreciation: Depreciation is inevitable, but new cars lose more of their value in the first years of ownership than a used car, which has typically already seen its value drop. New vehicles can lose as much as 20% of their value in the first year of ownership, while losing only around 40% in the first five years.
- Dealer fees and add-ons: Add-ons can add up. This is especially true of the ones that aren't essential to the vehicle, like paint or fabric protection. Watch out for loan packing as well, where the dealer or lender adds services to the contract without mentioning them. Common things to see here are GAP insurance, extended warranties, credit insurance, financing fees, and rustproofing.
- Taxes and Registration: Taxes and registration need to be paid in most cases, depending on where you live. Some states have higher sales tax than others, especially on large goods like vehicles. Registration fees can also vary by state, sometimes costing under $100, sometimes costing much more. Some states charge a flat fee, while others go by vehicle weight.
Methods to Determine Car Affordability
Using Online Affordability Calculators: There are many online calculators that you can use to determine which auto loan amount is best for you. These come in the form of loan estimators, payment calculators, and amortization calculators.
You can find out how much of a loan you may be able to afford on our site by using our car loan estimator and our car payment calculator.
To get to know your budget, you can also calculate your DTI and PTI yourself, just like a lender will. This way, you know what you have to work with. These important calculations can tell you how much of your income will go toward your loan and how much you can expect your payments to be.
To find your DTI, add together all your monthly payments, including loan payments, credit card payments, and recurring charges such as utilities. Then, divide this total by your pre-tax monthly income. Multiply the answer by 100 to get the percentage of your income that's already being used to pay bills.
For example, if your monthly debts equal $1,294 a month and your income is $2,400 a month, then your DTI is around 54%.
- 1294/2400 = 0.5391
- 0.5391*100 = 53.91%
This is higher than a lender would normally like. Lenders typically prefer borrowers with a DTI below 45%.
To find out how much of your income is being used by a single payment, divide that payment by your gross monthly income, and then multiply by 100. Lenders prefer your car payment to take up no more than 15% to 20% of your available gross income.
If you are looking for a payment you can afford, find 20% of your income, and opt for a car payment that's no more than that amount. Using the example above, if your income is $2,400 a month before taxes, 20% is $480.
So, to stick to a budget and still buy a vehicle, you could then look for a car with a monthly effective cost of $480 or less.
New vs. Used Car: Which Is More Affordable?
Whether or not a new car or a used car is more affordable depends on your needs and your situation. Often, a new car can cost more upfront, but save you money down the road by needing less service and repair. A used vehicle, on the other hand, may be a cheaper purchase, but upkeep and maintenance could cost you more in the future.
A happy medium between the costs of a new and used car may be found when you opt for a Certified pre-owned vehicle, or CPO. These are used cars, which are typically only two to three years old. These cars tend to be in better condition than a standard used vehicle and have undergone a certification and refurbishment process handled by a manufacturer-certified mechanic.
How to Save Money When Buying a Car?
Saving money on your next vehicle is possible if you know how to get the most out of your situation. Knowledge is power, and your credit score is the first thing you need to know. You can get a free copy of your credit report once a week from annualcreditreport.com. When you know your score, you can prepare for the other terms of your loan.
- Get Preapproved: Pre-approval allows you to know how much you'll be working with, so you can search for a vehicle within a specific budget.
- Negotiate with the Dealer: A dealer can play with certain loan factors such as vehicle price, down payment, loan term, and some fees, and it never hurts to ask what they can do for you. Many dealers will waive fees and work with you and the lender to get your costs as manageable as possible.
- Limit Add-Ons: Some add-ons that are offered by a dealer may appear to be a standard item to the untrained eye, so you have to be careful not to get charged. It pays to go over the list and exclude things you don't need, or things that can be found independently for cheaper.
- Shop for the Best Insurance Rates: Full-coverage insurance is mandatory when you're financing a vehicle. Rate shopping is a good way to compare insurance coverage and costs to see which option is most affordable for you.
- Avoid Long Loan Terms: The shorter your loan term, the less you pay in interest. Stretching your loan out may bring down your monthly payment, but paying for a longer amount of time means paying more in interest charges over the life of your loan.
The Bottom Line
Shopping for a car means doing your homework and knowing your budget, since a lot more goes into how much a vehicle costs besides its initial price. The cost of ownership can be a lot more than people bargain for. To know how much car you can afford before you get in over your head, be sure to research average interest rates for your credit score range and calculate your spendable income ahead of time.
And, if you're a bad credit borrower, be sure you're working with the right special finance lender for the job. They are well-versed in working with people who are in unique credit situations, and are typically more prepared to work with low-credit borrowers.
