You can likely afford a $20k car if your gross annual income is around $50k-$60k or more, following rules like the 25% income rule or the 10% take-home pay rule for total car costs (payment, insurance, gas, maintenance). To truly know, calculate your total monthly car budget (under 20% of take-home pay) and factor in a 20% down payment, a 4-year loan, and your credit score, as high interest rates significantly increase costs.
Since every financial situation is different, there's no perfect formula for how much you can afford; that said, our short answer is that your new car payment should be no more than 15% of your monthly take-home pay, meaning what you keep after taxes and insurance.
For instance, using our loan calculator, if you buy a $20,000 vehicle at 5% APR for 60 months the monthly payment would be $377.42 and you would pay $2,645.48 in interest.
Toyota Corolla (2017-2019)
The Toyota Corolla is one of the most reliable cars you can buy. The 2017-2019 models are comfortable, efficient, and come with a range of safety features like lane-keeping assist. It is a car that you can trust to keep running for a long time, and that is what makes it such a great deal.
For a $20,000 car, a good down payment is at least $2,000 (10%) for a used car, but ideally $4,000 (20%), to reduce loan risk and lower monthly payments, though putting down as much as you comfortably can is always best to save on interest.
Breaking Down the Rule's Parts
The 20 refers to the minimum amount of money you should put down when you purchase a vehicle. More specifically, the rule is advising you to put down 20 percent of a car's purchase price at least.
A $20,000 loan over 5 years (60 months) costs roughly $2,600 to over $7,000 in interest, with monthly payments varying significantly by Annual Percentage Rate (APR), such as around $377 at 5% APR or $445 at 12% APR, meaning total repayment could range from approximately $22,600 to over $26,700.
Buy on a Monday
Some people advise shopping for a new or used car on the busiest day of the week, usually on the weekend. The rationale is that salespeople will be so busy that they'll try to reach a quick deal so they can move on to the next customer and make their money on volume rather than one overpriced car.
To qualify for a car, you generally need a minimum gross monthly income of $1,500-$2,500, but lenders focus more on your Debt-to-Income (DTI) ratio, aiming for total monthly debts (including the car payment) to be under 36-43% of your gross income, while keeping total car costs (payment, insurance, gas) under 15-20% of your take-home pay. Your credit score, down payment, loan terms, and the car's price also significantly impact approval and rates.
For under $20k, the best cars offer great value, reliability, or fun, with top contenders including the reliable Toyota Corolla/Camry, spacious Honda Accord/CR-V, efficient Hyundai Elantra, and versatile Subaru Crosstrek, with newer EVs like the Chevy Bolt also becoming options, focusing on dependable, well-equipped used models. Your choice depends on prioritizing fuel economy (Corolla Hybrid), space (Accord/CR-V), AWD (Crosstrek), or electric driving (Bolt).
While it depends on factors like your credit score, loan terms, down payment and any potential trade-in value, you may find that a vehicle in the $20,000 to $35,000 range will fit your budget.
A down payment between 10 and 20 percent of the vehicle price is the general recommendation, although you can put down more. One reason to make a down payment is to reduce the amount you must borrow. By reducing the amount financed, you save some even before you start negotiating the car price.
It may be easier to secure a loan for a new car than it is for a used car, and new car loans often come with lower interest rates. Used cars can be a good fit if you're on a budget and they generally cost less to insure; however, interest rates for used car loans are often higher than for new car loans.
Rates and terms are subject to change without notice. Example: A six year fixed-rate loan for a $25,000 new car, with 20% down, requires a $20,000 loan. Based on a simple interest rate of 3.4% and a loan fee of $200, this loan would have 72 monthly payments of $310.54 each and an annual percentage rate (APR) of 3.74%.