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How Much Car Can I Afford?

a young couple smiling looking inside the driver's side window of a new vehicle

Shopping for a car is an involved process that starts with figuring out how much you can spend. Although you need a reliable vehicle, you want to avoid spending too much on a down payment now and then car payments every month for the next three to five years.

Experts in the personal finance industry generally agree that people should not spend more than 10 percent of their monthly take-home pay on a car payment. They also recommend limiting all car-related expenses to no more than 20 percent of your budget. This includes things like insurance, fuel, and repairs.

How Much Do You Have Available To Spend?

The first step in creating your budget is to know exactly how much car you can afford with the money available to you.

For example, what is your take-home pay and how much money do you currently have in your checking and savings accounts? Can you make a down payment without having to borrow money? Remember that you will need to finance less of the auto loan the more money you can put down upfront.

It’s not recommended to dip into an emergency account or your retirement savings to finance a car, even if you end up borrowing more than you would like. Most people have good intentions about repaying these accounts, but it rarely seems to happen. You do not want to borrow against your future and then not have those funds available when you need them.

Factors Affecting the Total Cost of Ownership of a New Vehicle

Here are some of the expenses you can expect to take on when you purchase a new car:


If you know you will be buying a new car in the next couple of months, save your gas receipts to get an idea of how much you typically spend in a week or month to put gas in your car. With gas prices being unpredictable, shopping for the most fuel-efficient car available makes sense for your budget.


Whether you pay it monthly, quarterly, or bi-annually, car insurance can take up a big chunk of your budget.

Arkansas requires that drivers carry liability and bodily injury coverage. All other coverage, such as comprehensive, uninsured, and underinsured motorist, collision, and personal injury protection is optional.

Telcoe Federal Credit Union is happy to provide you with an insurance quote once you have a vehicle in mind. You automatically receive a discount for being a credit union member and may be eligible for additional discounts like multi-car, anti-lock brakes, or good student.

Maintenance expenses

This includes proactive services to keep your car running its best. Oil changes and periodic tune-ups are just two examples.


All cars need repair at some point, and some of them can be costly. We recommend researching common car repair issues and average costs in Arkansas to add to your budget. If needed Telcoe does offer extended warranties through ROUTE 66 Warranty at a fraction of the cost charged by the dealership.

Vehicle tags

Arkansas requires you to have your vehicle assessed by a county assessor before renewing tags each year. The amount you pay for tags depends on the year, make, and model of your vehicle. You may want to contact the Arkansas Department of Finance and Administration to get an estimate for these expenses to factor into your car-buying budget.

What Are Your Financing Costs?

Once you have a good understanding of how much car you can afford, request a free copy of your credit report and ask for your credit score. The Fair Credit Reporting Act entitles all consumers to a free annual report from all three major credit reporting agencies.

The higher your credit score, the better the financing deal you can expect to receive. Financing refers to the amount of your down payment, how much you finance and for how long, your monthly payment, and your interest rate. If you are working with a dealership and trade in your old car, that will reduce the amount of money you need to finance.

It is a common experience to see one price for a vehicle on a dealer’s website and then find the actual cost is higher when you start talking about closing the deal. You need to consider the other fees you will have such as sales tax, documentation fees, and car registration fees.

The sales tax rate in Arkansas is currently 6.5 percent, but it can be as high as 12 percent in certain parts of the state that charge local sales tax. You will always pay more than the sticker price for a car when you finance it because of added interest.

Insurance add-ons can also increase the amount you finance for a new car. Telcoe Federal Credit Union offers these products for your consideration:

Depreciation Protection

This insurance add-on is a debt cancellation when you file a total loss claim on your car. You receive a payment that subtracts the difference between the NADA retail value on the date of your loss and the remaining balance on your loan. This can be a good option if you finance 90 percent or less of the value of your new car.

Extended Warranty

Purchasing an extended warranty provides coverage for breakdowns and repairs beyond what the original vehicle warranty offers. We work with Route 66 to offer a zero deductible extended warranty with roadside assistance, car rental reimbursement, and a 30-day money-back guarantee if you change your mind.

GAP Insurance

No one wants to keep making payments on a stolen vehicle or one destroyed in an accident, but it happens. GAP insurance pays you the difference between the remaining balance on your vehicle loan and the value appraised by your insurance company when your car became non-drivable.

Consider Using Our Vehicle Affordability Calculator

Our Vehicle Affordability Calculator asks eight questions to help you determine how much car you can afford.

After you have a potential loan amount in mind, contact us to start an application. We also invite you to check out our competitive rates for yourself.


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