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How Much You Should Spend on a Car

October 21, 2020

Purchasing a car is a major financial decision. It can also be a daunting process. How much can you afford to spend? How much should you spend on a car? How do you determine your budget?

All of these questions can make the car-buying process more mysterious and confusing than it needs to be. We’ve compiled a guide to help you make some key decisions and create a budget-conscious financial plan for purchasing your next car.

How Much Is The Average Car?

In 2018, according to Edmunds, the average used car price was approximately $20,000. This is significantly cheaper than the average new car price, $37,000 in January 2019 according to Kelley Blue Book.

It’s important to consider, though, that this is just the price for the car itself, and owning a car comes with additional expenses such as the cost of gasoline, maintenance, insurance, license and registration fees, and other expenses.

For gasoline, motor oil, and other vehicle-related costs (on top of the price of purchasing the vehicle), the US Department of Labor estimated that the average driver pays $5,522 per year. While this number is not directly related to the amount you budget to actually purchase the vehicle, it’s important to consider all of the associated costs when considering purchasing a car.

How Much Should You Spend On A Car?

It’s important to know the difference between how much you can afford to pay and how much you should pay. You might be able to afford a brand-new luxury vehicle if you pay for it over many years. However, this might not be the best financial decision for you.

When looking at your monthly budget, many experts recommend using the 20/4/10 rule to figure out how much you can afford to pay for a car each month.

The 20 stands for 20%, meaning you should put at least a 20% down payment on the car at the time of purchase.

The 4 stands for 4 years, as in, you should try to avoid taking out a car loan for longer than four years.

The 10 stands for 10%, meaning no more than 10% of your gross income should be dedicated to paying for your car - this includes all of the expenses discussed above: car payment, insurance, gas, parking, interest, etc.

However, this is just one philosophy. Depending on your needs, some say that up to 20% of your gross income could be dedicated to your car. For example, if you have a family and need a big, reliable vehicle for family road trips and get around town, you might need to factor this into your budget.

With these guidelines, you can determine approximately how much income you have that can go towards a car. Knowing that number before you start shopping is an important way to keep from getting convinced by a dealer into a car that’s out of your price range.

How Do I Look For A Car In My Budget?

First, be sure to consider whether you want to purchase a new car, a used car, or lease a car.

Leasing a car is akin to renting an apartment and can often have lower monthly costs and a smaller down payment or no down payment at all. However, leasing a car is not for everyone, and if you drive a lot or want to keep your car for a long time, purchasing might be a better option for you due to mileage limits and short leasing terms.

If you are buying a new car, or even a gently used one, there’s a good chance you are not going to pay for the entire car upfront. You’ll probably need to finance it, which means you will borrow money from a financial institution to purchase the car and pay back the borrowed money with interest.

One of the best ways to ensure that the car you find is in your budget is to first figure out what loans fit in your budget. There are many places you can search for car loans, including local credit unions and banks.

Once you are aware of the different types and amounts of car loans available, you can use a monthly car loan calculator to figure out which of those loans is the best option for you.

It’s often best to have pre-approval in hand before you start shopping. Many financial institutions offer this option – this is basically documentation that says how much of a loan you could get approved for and at what interest rate. This can help keep you grounded when shopping at a dealership and helps protect you from falling prey to sales tactics that may convince you to spend more than you anticipated.

Creating Your Car Budget

Even using the 20/4/10 rule, it can be hard to determine how much you should put down on a car in the first place.

Do you need more help figuring this out? Click the button below and get on the road to purchasing your new vehicle.

How Much You Should Put Down on a Car

 

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