Avoiding long auto loans: How to get a car payment you can afford

Auto loans: How to get an affordable car payment

As tariffs are expected to drive up car prices soon, Ford's CEO says more people will likely take out longer car loans to bring their monthly payments down. But a long car loan can create problems for the buyer.

HOUSTON - As tariffs are expected to drive up car prices soon, Ford's CEO says more people will likely take out longer car loans to bring their monthly payments down.

In fact, longer car loans, reaching seven, and sometimes even eight or nine years, have become increasingly more common.

Long loans can create problems

Why you should care:

A long car loan can create two problems for the buyer.

"Your interest rates are generally higher on those longer-term auto loans.  And because you’re paying over a longer period of time, if you add up all the interest, it adds up to significantly more than if you had that shorter-term loan," explained Kim Palmer with Nerdwallet.

You can also end up "underwater" if you need to sell the car before you pay off the loan.

"If you take out a loan that is eight or even nine years long, you can end up in a situation where your car is worth less than what you’re still paying in principle on those car payments," said Palmer.

Calculating car costs

By the numbers:

So how much car can you really afford?

"We recommend spending no more than 10% of your take-home pay every month on a car payment," suggested Palmer.

Nerdwallet offers an online calculator called, "How much car can I afford?"

The average monthly take-home pay in the U.S. is $4,400. That means ten percent is a $440 monthly car payment.  

Using the calculator, a 48-month loan with good credit means you could finance $18,500.

But remember the total price should include state and local sales tax, title, and registration fees.  Let's say about $1,800.  

If your trade-in or down payment is $4,000, then you could buy a car priced at $20,700.

"You also want to consider the costs that go along with car ownership. Like gas, insurance, even fees for registration.  You want to keep the car cost for all of that under 20% of your take-home pay each month," said Palmer.

Nerdwallet offers a calculator to determine the total cost of owning a car as well.  We put in the $440 car payment, insurance at $143 a month, gas at $120, maintenance and repairs at an average of $126, and taxes and miscellaneous costs at $68.

That made the monthly car cost $897, which is just about 20% of the monthly take-home pay in our equation.

What you can do:

Remember to shop around first for the best auto loan interest rate before you go car shopping.  Get pre-qualified from your bank, credit union, or online lenders.  Take it with you and ask the dealership if they can beat it with their own financing options.