How Much Should I Spend on a Car?

Leather interior. Rear-view cameras. Automatic emergency braking. While you may fantasize about owning a brand-new vehicle with all of these features and more, you should be prepared for sticker shock.

According to Kelly Blue Book, the average new automobile will cost more than $49,500 by the end of 2022, with used cars costing more than $26,500 in early 2023. You must consider your demands, budget, and other financial goals before deciding how much you can and want to pay to meet your transportation needs. Whether it's a used or new vehicle, we'll do our best to make the decision easy for you.

How to Calculate How Much You Can Afford to Spend on a Car

When determining how much you should spend on a vehicle, keep in mind that the purchase price is only one component of your spending.

To ensure you can comfortably afford the car you want, consider the following:

1. Income.

Spend no more than 10% of your salary on transportation costs, which include car payments, insurance, and gas. For example, if you make $4,000 a month, you should not spend more than $400 on transportation. Furthermore, it is recommended that your down payment be at least 20% of the entire purchase price of the vehicle and that your loan duration be 48 months or shorter. J. D. Power. "What Is the 20/4/10 Rule of Buying and Financing a Car?"

To be clear, that range is only for guidance. Depending on your income and spending, you may need to budget less. For example, if you reside in a location where housing costs are high, you will have less money to spend on a car.

2. Existing debt.

If you have debt, such as student loans, medical expenses, or credit card liabilities, your payments may take up a significant portion of your income. Lots of debt will reduce your car-buying budget. 

3. Financing

When you apply for a loan, lenders consider both your application and your credit score. Once your loan is accepted, the interest rate will be determined. This rate, which is determined by your credit score, contributes to the amount you must return. 

Your interest rate influences both your monthly payments and your total repayment costs; a lower rate implies you'll spend less over the course of the loan.

In August 2023, the average interest rate on a car loan from a commercial bank was 8.30% over 48 months. Borrowers may get a lower or higher rate according to whether they have good or subprime credit.

4. Taxes and fees.

When you buy a car, the purchase price is merely one component of your overall plan. You'll also pay fees—and, in most jurisdictions, taxes—for: 

• Sales tax: If your state requires sales tax, you will pay it on the purchase price minus any discounts or trade-in allowances. A few states do not tax car sales.
• Registration Fee: You must register your vehicle. Registration fees differ by state and can be attributed to a variety of variables. Depending on the car and where you live, you could spend as low as $15 or much more than $100 every year.
• Tag and title fees: You must pay for the title and license plates for your vehicle. 
• Documentation or dealer fees: These costs are commonly charged in certain states. These fees are in addition to the other costs and vary according to area.

Consider the following example to see how these expenses can increase your overall cost. If you bought a $30,000 car in Florida, you would have to pay the following:

• Sales tax: $1,800 (6% sales tax)
• Initial registration fee: $225
• New title fee: $77.25
• Original license plate fee: $28
• Dealer fee: $399 (varies by location)
• TOTAL: $2,529.25

5. Car insurance premiums.

Nearly all states require drivers to carry liability insurance. However, most drivers also choose collision and comprehensive coverage for added protection. 

According to Zebra, the typical car insurance policy in the United States costs $1,759 per year, or around $147 per month, as of December 2023.

Your premiums are determined by the type of automobile you own, your age, your driving history, your location, the coverage options you choose, and the number of miles you plan to travel. 

Remember that the type of vehicle you drive influences the amount of insurance you pay. Insurance for newer, more costly cars is often more expensive, though there are exceptions to this trend.

6. Maintenance fees.

While you may not be considering repairs for a new vehicle, all cars require upkeep. If your vehicle is older, it may require a tune-up or replacement tires. 

Maintenance costs approximately 9.55 cents each mile. If you travel 12,000 miles a year, you should budget $1,146 for maintenance.

7. Fuel

If you commute to school or work, gas is another expense to factor into your budget. According to a Bureau of Labor Statistics estimate, in 2022, the average person spent $3,120 on petrol, or $260 per month. However, if you have a long commute or love road excursions, your actual cost could be far greater. To add money to your budget, choose a car with a smaller engine that uses less petrol.

Deciding Your Budget 

Using the information provided above, below is an example of how to establish a car-buying budget. For this example, we factored the cost of tax, title, and fees into the car's purchase price. 

If your annual salary is $100,000 and you follow the 20/4/10 formula (20% down payment, 4-year loan term, and 10% of earnings for transportation costs), you'll spend approximately $833 per month on transportation. After removing the cost of your insurance and setting aside money for fuel and maintenance, you'll have $330.50 per month to utilize as a car payment.

If you take for a 48-month loan with an 8.30% interest rate and put down 20% of the vehicle's price, you can afford up to $16,687.50. With 20% down, you would borrow $13,350 and make a monthly payment of $328.

Buying a Car

Once you've found a car that meets your demands and fits your budget, you may negotiate the best price with the dealer. Before you go to the dealership, get financing so you may browse around and locate the best deals—and have greater negotiation leverage before closing the transaction.

The Bottom Line

Knowing how much to spend on a vehicle is more than simply knowing the price of the car you want. It is vital to remember that there are other costs associated with car ownership, such as fuel, insurance, maintenance, registration fees, loan interest, and so on. You'll be in the best financial position if you have a large down payment and choose a loan with a shorter term to decrease your interest payments. When calculating how much you can afford to pay each month, make sure to include additional expenses.