“How much car can I afford?” is usually the first question before stepping into a dealership or scrolling through listings online.
But is it easy to answer? Not really — especially when the typical car price sits around $38,000 according to Kelley Blue Book. Yikes.
There’s no shortage of simple rules about how much you should spend on a vehicle. Common guidance includes:
- You shouldn’t allocate more than 20% of your take-home pay to all car-related costs.
- Your down payment ought to be about 20% of the car’s purchase price.
Use our car affordability calculator to model different scenarios taking into account down payment, trade-in value, and loan size.
What Financial Pros Suggest
Financial planners warn that calculators and rules of thumb don’t capture everything — such as insurance costs, your credit rating, and how much liquid cash you have.
“I generally think those rules of thumb will often lead to more spending in the long run,” says H. Jude Boudreaux, a certified financial planner in New Orleans whose father ran an auto dealership.
Patricia D. Hausknost, a CFP based in Long Beach, California, concurs that widely used guidelines are limited. She jokes that her stock response to car-buying questions is “it depends” — and that’s a reply she stands by.
“It depends on your individual financial picture. You have to assess your own circumstances and decide, ‘What can I do and what’s best for me?’”
Seven Questions to Consider Before Deciding How Much to Spend
With apologies to anyone itching to test-drive now and think later, here are seven questions advisors recommend you answer before settling on a car budget.
1. What’s Motivating My Vehicle Choice?
Are you replacing an old “beater” that’s good for daily use only? Do you need a more dependable ride for a harsher climate you’ve moved into? Or are you aiming for better fuel economy?
Understanding why you’re shopping clarifies other choices, such as new versus used and lease versus finance.
And don’t forget to factor in the future, Hausknost advises.
“How has your life shifted and is it likely to remain that way?” For example, the move to remote work could change your vehicle priorities. A growing family or upcoming retirement are common things to weigh.
But if you simply adore the new-car appeal and want a change, that’s valid too — just be sure to proceed through the remaining questions. If the numbers check out, enjoy the ride!
2. Do I Know My Cash Flow?
Do the math. Know your incoming money (income) and outgoing funds (expenses). Ideally you’ll have surplus cash for a new car. This knowledge will inform decisions about monthly payments, loan terms, and more.
3. What Can I Bring to the Deal?
If you have cash savings, determine how much you’re willing to spend. Can you buy a reliable used car outright? Or would you rather make a substantial down payment on a new model? Upfront cash can often get you a better deal, Boudreaux notes.
If you plan to trade in a vehicle, check its worth using an online estimator like the one from Kelley Blue Book before you negotiate.
4. How Much Borrowing Is Reasonable?
Those earlier rules of thumb? They’re a starting point if you’re thinking about financing. Bob DiDonato, an advisor with Ameriprise Financial Services in Brookfield, Wisconsin, uses two simple measures:
- The car’s price should not exceed roughly one-third of your annual gross income.
- Monthly car loan payments should be no more than about 10% of your take-home pay.
“It’s a gut check,” DiDonato explains. “Ultimately everyone’s situation is unique.”
Can you meet or stretch those benchmarks? Here are the factors DiDonato and other advisors ask their clients to review:
- Any other outstanding debt.
- Your cash flow (see Question 2).
- Expected upcoming expenses.
- How much you have in an emergency fund.
- Your credit score, since it affects the interest rate you’ll pay.
The higher your credit score, the better the loan terms you’re likely to receive — which reduces costs. If your score is low or nonexistent, you might accept a higher rate to build credit or work on improving your score first.
Boudreaux learned a tip from watching his dad sell cars: don’t fixate only on the monthly payment.
“That figure can be misleading because dealers can structure deals to hit that monthly target,” he warns. His counsel is to negotiate the purchase price first, then the financing terms.
DiDonato adds a personal-finance question: “What amount of debt are you emotionally comfortable with?” If car payments cause anxiety, it’s time to recalculate your plan.
5. What Are the Less Obvious Costs?
What new or higher expenses will come with this vehicle? DiDonato lists this among his key purchase questions. Avoid surprises at the dealership by considering:
- Car insurance premiums. Whether new, used, or leased, your insurance bill could rise. Contact your agent or use an insurer website to estimate costs.
- Maintenance expenses. Research typical upkeep costs for the model you’re eyeing (Kelley Blue Book offers an estimator). Some vehicles need pricier oil or fuel. The EPA site lets you check fuel costs by make, model, and year.
- Sales tax and fees. These differ by state. Check your state motor vehicle office or add roughly 10% to the car’s price for a rough estimate.
- State charges for title, licensing, and registration — which vary by transaction type and location.
6. Have I Looked at Alternatives to Buying New?
Flexibility in what you’re willing to accept will increase the likelihood of staying within budget. “The hardest part is not getting emotionally attached to just one vehicle,” Boudreaux says. You’ll generally save if you’re open to leased or used cars. Alongside your answer to Question 1, consider these points:
If considering a lease:
- You often get more car for your money with a lease because monthly payments are typically lower relative to the car’s value, Hausknost explains.
- Check what maintenance is covered; some leases include service plans that can reduce hassle and cost.
- Most leases assume about 12,000 miles per year and charge extra if you exceed that limit.
- Leasing may not suit you if you prefer to keep a car for many years or dislike ongoing monthly payments.
- When a lease ends you usually have the option to buy at a contract price; research whether that residual price is fair before deciding.
If considering a used car:
- Depreciation may be faster with a used car, so resale value can be lower when you trade or sell.
- Maintenance and repair costs could be higher; an extended warranty can help avoid unexpected bills.
- Ex-lease vehicles can be bargains if you shop carefully.
- Financing a used car often means a higher interest rate, though lower purchase price can reduce how much you need for a down payment.
7. Final Reality Check: Am I Being Practical?
Many shoppers underestimate the real impact of monthly payments or an upfront cash outlay, DiDonato notes.
“Most situations require some analysis,” he says. Deciding how much car you can afford “shouldn’t be a slapdash choice.”
Discussing the decision with a trusted friend, family member, or financial advisor can help. Keep your other financial objectives in mind, like saving for a home, vacations, retirement, or a child’s education.
Will those goals suffer because of a monthly car payment? Also be honest about job stability and your spending habits.
“Buying a new car is an emotional choice,” Hausknost says. “Let your head guide you, not your heart!”
Marisa L. Connors is a Wisconsin-based writer, editor, and communications specialist with experience across newspapers, magazines, websites, and nonprofits. She contributes to Savinly.
