How Much Should I Spend on a New Car?

Buying or leasing a new (or new to you) car can be exciting, but it’s also a major financial decision. You want to get the car you want, but you don’t want to spend more than you can really afford.

If you’ll be taking on a loan or leasing a car, you’ll be making payments on that car every month for years. It’s important that you take the time to find the right vehicle at a price you can afford so you don’t fall behind on your payments or find yourself regretting your purchase.

There is no one single formula that will help you determine how much car you can afford, but there are some best practices and general rules that you can use. Deciding what you can afford is a personal decision, but the following steps will guide you through the process.

Determine What Car Payment You Can Comfortably Afford

Before you start exploring different car models or even decide whether you want to buy or lease a new vehicle, you need to get a sense of the monthly car payment you can afford. It’s best to spend 10% or less of your monthly take-home pay, which is what you receive after taxes. Using this rule of thumb, if you bring home $4,000 after taxes each month, you could afford a $400 car payment.

That isn’t to say that you want to even go that high with your monthly payment.  Depending on your other expenses and financial goals, that might not be comfortable for you. You want to strongly consider other financial obligations, like debt you’re paying off or upcoming large purchases such as paying for a wedding.  Consider creating a realistic monthly budget to get an accurate idea of how much money you can really afford to put toward a car payment.

It’s also important to consider how long you might be making those payments. If you plan to lease a car, then you will probably be making payments for 36 months, or less if you turn your lease in early. If you buy a car, payment terms typically last for four to eight years. Consider whether you’re comfortable making that payment over an extended time.

You may also want to think about whether your financial situation is stable, or if it’s likely to change. For example, if you plan to quit your job, have a baby, or buy a house in the next few years, the amount of money you have available for a car payment could change. While you can’t plan for every life event, do some serious thinking about how your finances could change in the coming years.

Consider Your Down Payment

Take a look at your personal finances and savings to determine how much you can afford to put down on a new car. The more you put down, the lower your monthly loan payments will be, but it’s also important not to strain your finances by putting too much cash into your car.

If possible, spend some time saving up for your down payment. If you currently have a car you plan to get rid of, think about whether you should sell it privately for cash, or if you’ll receive more value if you trade it in. Getting into the habit of putting some money from each paycheck into a savings account can also help you save up for the down payment you need.

Calculate What Your Car Loan Payment Will Be

Once you know what you can afford to put down and how much you can afford for your payment, it’s time to take it a step further by using a car payment calculator. You can start to get a sense of what your vehicle’s purchase price should be based on the downpayment and monthly payment you can afford along with other factors like your credit score, loan term and potential interest rate.

You won’t know your exact interest rate until you apply for a car loan, since interest rates are based on your credit rating. The higher your credit score the more likely you will be offered a lower interest rate. While these financial calculators won’t be completely accurate, they can give you a rough idea of what your monthly car loan payment may be.

Set a Goal Purchase Price

Now, with all of the information you’ve gathered, it’s time to come up with a car purchase price you’re comfortable with.

Keep in mind that just because you could afford a large car payment doesn’t mean you have to choose a vehicle at that max price.

When determining your goal purchase price, don’t forget to budget for additional expenses that come with buying a car. Your sales tax can vary depending on your state and city, but it usually ranges from 5 - 10% of your vehicle purchase price. Registration fees and a documentation fee also vary depending on your state.

Budget for Repair and Maintenance Costs

If you’re exploring different vehicle makes and models, consider how much you’ll need to pay annually for maintenance and repairs. It’s typically found that imported and luxury vehicles are more expensive in these areas because the parts must be imported and typically cost more in general.

An American made affordable vehicle that’s widely available throughout the country can be more economical to repair and maintain over the years.

Plan for Car Insurance

You will also need to make sure that, in addition to your monthly car payment, you can afford the car insurance payments on your vehicle. If you are upgrading to a new vehicle that costs significantly more than your current one you could see a jump in your car insurance rates.

The type of car that you buy or lease is a major indicator of how much you’ll pay for car insurance. Luxury vehicles and those with a higher overall value also cost more to insure, because your car insurance company would have to pay more to replace or repair it after an accident.

There are some features you can look for that may lower your car insurance rates. Many companies may offer a discount if your car is equipped with safety features that decrease the risk of theft or accidents, like anti-theft devices and lane departure warnings.

Once you do find a new vehicle, be prepared to shop around to find the best policy. This is easy when you use a site like Compare.com. With Compare, you’ll spend about five minutes sharing details about your driving record, insurance needs and vehicle. Then, we’ll compare quotes from 65+ insurance companies and present you with the most affordable options. Compare.com drivers save an average of $720 per year on car insurance.

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Consider Different Purchasing Options

Buying a new car can be exciting and rewarding, but if you can’t comfortably afford the vehicle you want, keep in mind that you have other options.

Leasing a vehicle can give you access to the same car for a lower monthly payment, or you might consider buying an older model for even less.

The car market is particularly hot right now, so it may take longer than usual to find a good deal on a vehicle in your price range. Be patient and remember to spread the word to others, including your mechanic, family, and friends, so they’re all aware that you’re looking for a vehicle.

When you’re prepared with all of your financial information and you know just how much car you can afford, you’ll be ready to purchase the right car when it does come along.

FAQs About Affording a New Car