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How Much Car Can I Really Afford?
Got your eye on a brand-new ride? Exciting, isn’t it? Shopping for the vehicle of your dreams can be an exhilarating experience. There’s just something about that new car smell that revs up the engines and puts you in a buying mood. But getting caught up in the moment can make it easy to overspend. So before you fork over your hard-earned cash, take some time to think about what you can realistically afford.
Don’t worry. Budgets don’t have to be a bummer. With a little homework and some basic number crunching, you can get the car you want without emptying your pockets.
How to Determine If You Can Afford a Car
If you go into the car purchasing process with some key numbers, you’ll be more prepared to buy. And the numbers are fairly simple. You earn an income and you have fixed expenses, like rent, healthcare and food. The amount left over after paying those expenses is the money you have to spend on cool things — like cars!
If you’re thinking, how much of my income can I spend on the car, remember the 20% rule. Financial experts say your car-related expenses shouldn’t exceed 20% of your monthly take-home pay. So, let’s say you bring home about $2,500 each month. The total amount you should spend on your car — including loan payment, gas, insurance and maintenance — is right around $500. If you stay within these limits, you should have no problem paying for your ride. Want to spend a little more, you can always cut back somewhere else.
However, everyone’s budget is different based on the expenses that you have. Take your personal finances into account to ensure that adding a new car payment won’t add additional stress.
What Priced Car Can I Afford?
A budget between 10% and 50% of your annual income is what you could reasonably expect to spend on a car. When you’re cruising ad pages for that new ride, keep a budget in mind that fits you and your lifestyle. This is the most important bit of information to have with you while you shop for a new car.
Who can afford a new car?
Many buyers fret over the process of buying a new car, but you don’t have to. Buying a new car can be a very exciting process! The most important thing to do, before you begin your car buying journey, is determine how much you have to work with.
If you craft a budget and stick to it, a budget that can accommodate a new car, the answer could be — you!
Can I afford a new car?
Have some extra money saved for a down payment? The more you put down on a car, the less you’ll have to borrow, the less interest you’ll pay over the length of the loan, and the lower your monthly payment. Remember, your down payment doesn’t have to be all cash. Got a trade-in? That counts too.
When you know how much car you can afford, you’re removing a big chunk of the stress. So, let’s take a look at how to determine if you can afford a car.
Consider your annual income
According to MoneyUnder30 the recommended range for a vehicle budget spans from 10% of annual income to 50%. For example, let’s assume earnings of $50,000.
The 10% rule
One rule you may wish to follow if you’re more on the frugal side is spend no more than 10% of your annual income on a car. Let’s say you make $50,000 annually.
10% of annual income: $5,000, the amount to spend on a vehicle.
Now, $5k isn’t likely to net you a new vehicle, but you could find a great used car under $5,000 with our helpful guide.
The 50% rule
Vehicle purchase price: $25,000 = 50% of $50,000
According to Kelley Blue Book vehicle valuations, the average midsize car fits perfectly with a 50% vehicle budget. But remember, you’re going to need gas, maintenance, vehicle registration and more. Can you safely fit that into your budget?
The 30% rule:
A more modest and generally affordable cap would be 30% of your annual income. This gives you ample room to budget gas, insurance, maintenance and other car related expenses as needed.
Vehicle purchase price: $15,000 = 30% of $50,000
Your monthly payment
Now that you’ve got an idea of how much car you can afford — with a purchase price of $15,000 - $25,000 — you can begin to explore how much to budget per month.
With a budget of $15,000 financed over 60 months, 5% APR, this Experian APR calculator gives us a total cost of $16,984.11 for the vehicle. If we break that into monthly payments, you’re looking at $283.07 over the loan term (60 months).
These figures will usually depend on factors such as trade-in value, down payment amount, APR and potentially other fees agreed upon at the point of sale.
Always shop around for the best financing. Whether it be an online or in-person bank, a credit union or a dealer’s own financing company, look around for the best (lowest) interest rates.
Remember too, the condition of the vehicle you’re considering can pivot on your budget and your desired financing terms: 48, 60 and 72 months, typically. Your credit score will determine your annual percentage rate (APR), so be sure you know beforehand what your credit report looks like.
Factor in your vehicle expenses
You’ll need gas to get from A to B, and you’re also going need auto insurance to protect it. You’ll also need to set aside some money for oil changes, tune-ups and other regular maintenance work.
According to a AAA report on the cost of owning a vehicle in 2017, the average new vehicle will cost you nearly $8,500 annually for the car payment, insurance, maintenance costs and gas. That’s about $706 per month.
Here’s a breakdown of those car ownership expenses:
License, registration and taxes: $753 annually, which comes to roughly $63 per month
Maintenance and repair: $1,200 annually, or $100 per month
Fuel: $1,500 annually, or $125 per month
Full-coverage insurance: $1,194 annually, or $100 per month
Car Affordability Calculator — How to Calculate How Much Car You Can Afford
One simple rule you could apply to your car purchase is spend no more than 30% of your annual income on the vehicle of your choosing. This allows your budget to be flexible enough to cover the additional costs of maintenance, insurance and other expenses.
Auto finance calculators can also come in handy when you have all the budgeting and finance details pretty clear ahead of time. This will help you find an accurate monthly payment given your unique information.
Bottom line: with a basic budget and some smart shopping before you buy, you can save big money down the road. If you’re ready to buy but not quite sure where to start, check out these 9 tips to buying your dream car.
Protect Your New Car with Coverage From American Family Insurance
Want to find the right insurance for your new set of wheels? Your American Family agent can help you build a policy that fits your budget best.
Related Topics: Finance