How Much Car Can You Really Afford? | The Motley Fool (2024)

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Car shopping is both exciting and stressful. It's a lot of fun to test drive different cars and eventually get a new ride. But then there's negotiating with car dealers and deciding whether a car is really in your budget.

Given that car prices and interest rates have risen in recent years, finding a car that fits your budget can be a challenge. This guide will cover how to determine how much car you can really afford.

Jump ahead

  • How much should you spend on a car?
  • Customizing your car budget
  • Keeping your car costs down
  • Shopping smart for your next car

How much should you spend on a car?

Whether you're taking out an auto loan or a personal loan to pay for your car, it's a good idea to limit your car payments to between 10% and 15% of your take-home pay. If you take home $4,000 per month, you'd want your car payment to be no more than $400 to $600.

There's a caveat to this rule, though: Don't take out a long loan term just to lower your monthly payment unless absolutely necessary. Longer repayment terms on personal loans or auto loans will ultimately cost you more in interest. The longest auto loan you should get is:

  • 60 months if you're buying a new car
  • 48 months if you're buying a used car

The reason why you don't want to get an auto loan for longer than those terms -- besides the extra interest you'll pay -- is that you'll run a greater risk of becoming "upside down" on your loan. That means you may end up owing more on the car than the car is worth.

TIP

Comparing personal loan lenders

Before you drive into the sunset in your new ride, you'll need to find a loan you can afford. Make sure to watch out for lenders with hidden fees, as these can eat into your budget. Not sure where to start? Our experts compiled a list of their favorite personal loan lenders.

Don't forget, though, that your car payments are just one of the costs of car ownership. You also need to account for car insurance, registration fees, and maintenance.

A good rule of thumb in personal finance is that your overall transportation costs shouldn’t exceed 20% of your monthly take-home pay.

How much does the average car cost?

The average new car price was just above $48,000 in mid-2023, according to Kelley Blue Book. Meanwhile, the average used car price was just under $27,000, according to Consumer Reports.

Not surprisingly, high vehicle prices and financing costs have caused monthly car payments to surge. Edmunds reports that the average monthly car payment on a new vehicle was $733 in the second quarter of 2023. If you don't want your car payment to exceed 15% of your take-home pay, you'd need to earn nearly $4,900 after taxes to afford a $733 car payment.

Customizing your car budget

Although 10% to 15% of your take-home pay works well as a general guideline for buying a car, you also need to take into account your current spending habits.

Ideally, after factoring in your car payment, you should still be able to:

  • Pay for all the necessities
  • Put 10% to 20% of your income into a savings account
  • Have disposable income remaining for non-essential expenses

Look over your budget to see how much you're spending and saving each month. This will give you the most accurate idea of how much you can spend on a car.

For example, if you've been saving 30% or more of your income, then you have the flexibility to spend more on a car. On the other hand, if you aren't able to save much money, then putting 10% to 15% of your income toward a car payment may be far too much.

If you're wondering how much the monthly payment on a personal loan might be, use the calculator below. Enter the amount you'd like to borrow, then set either the monthly payment or loan term to what you're looking for. Experimenting with different numbers can help you find a loan term that works for you.

Personal loan for car: Calculator

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Keeping your car costs down

The advice above should give you an idea of the upper limit of your car budget. But keep in mind that spending less on a car is usually a good idea -- as long as you don't buy an old death trap.

Cars are an area where consumers overspend all the time. After all, we see cars as status symbols, and it can be hard to resist the temptation of getting the absolute newest and best model we can afford. The problem is that car values depreciate rapidly, and a new model comes out every year. Last year's status symbol ends up becoming this year's money pit.

Here are a few ways you can reduce your car costs as much as possible:

  • Buy used: New cars lose as much as 20% of their values during the first year. Even buying a car that's one or two years old can save you big time. With the way car technology has advanced, you can buy an older car that still drives well and has plenty of safety features.
  • Put more money down: You'll have less to finance and can get a loan with a shorter term, which can result in a lower interest rate for a personal loan.
  • Get an excellent credit score: If you're wondering, "What credit score do I need for a car loan?" there's no minimum score required to qualify. Each lender will have its own requirements. But generally, try to aim for 720 or higher. That way, you can qualify for the best personal loans. You'll also potentially save hundreds and perhaps thousands in interest compared to someone with fair or average credit.

Compare the best personal loans

Get the best rates and terms to fit your needs. Here are a few loans we'd like to highlight, including our award winners.

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There's a lot that goes into buying a car. It's a big purchase, and you definitely don't want to make a bad financial decision. When you take some time to evaluate your budget, you'll be able to calculate exactly how much money you can spend on a car, both per month and in total.

FAQs

  • If you made a 20% down payment using your cash savings and trading in your old car, you'd need an $80,000 car loan. Assuming a 7.41% APR, which is the average for a 60-month new car loan for someone with excellent credit, your monthly payment would be about $1,600. If you don't want your payment to exceed 15% of your take-home pay, you'd need after-tax income of $10,666 a month, or $128,000 per year.

  • Let's assume that you take home $4,000 a month after taxes on a $60,000 salary. An affordable car payment would be one that doesn't exceed $600 a month, based on the rule of thumb that your car payment shouldn't be more than 15% of your take-home pay. If you take out a 60-month car loan at 8% APR, you should aim to take out a car loan of less than $30,000. Examples of cars that cost less than $30,000 include a 2024 Kia Seltos, 2024 Honda Civic, and 2024 Subaru Crosstrek.

  • A good rule of thumb is to limit your car payment to 10% to 15% of your monthly take-home pay. Overall transportation costs, including your car payment, insurance, maintenance, and gas, shouldn't exceed 20% of your after-tax income.

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How Much Car Can You Really Afford? | The Motley Fool (2024)

FAQs

Is $600 a month too much for a car? ›

How much should you spend on a car? Whether you're taking out an auto loan or a personal loan to pay for your car, it's a good idea to limit your car payments to between 10% and 15% of your take-home pay. If you take home $4,000 per month, you'd want your car payment to be no more than $400 to $600.

How much car can you really afford? ›

How much car can I afford based on salary? According to our research, you shouldn't spend more than 10% to 15% of your net monthly income on car payments. Your total vehicle costs, including loan payments and insurance, should total no more than 20%.

How much should I spend on a car if I make $100,000? ›

Starting with the 1/10th guideline, created and pushed by Financial Samurai, this guideline states: buy a car in cash that costs less than 1/10th your gross annual pay. If you make $50,000 you should buy a car in cash worth $5000. If you make $100,000, the car you buy should be worth no more than $10,000.

Is $500 a month a high car payment? ›

According to Experian's third-quarter automotive finance report, drivers are spending over $700 and $500 each month for new and used vehicles, respectively. Insurance costs an average of $2,014 per year, according to Bankrate data.

Is $1,000 a month a lot for a car? ›

For large luxury models, $1,000-plus payments are the norm. Even a handful of buyers with subcompact cars have four-figure payments, likely due to having shorter loan terms, poor credit, and still owing money on previous car loans, according to Edmunds analysts.

What is a realistic monthly car payment? ›

The average monthly car payment is $738 for new cars and $532 for used. Several factors determine your payment.

What is the 20 3 8 rule? ›

The 20/3/8 car buying rule says you should put 20% down, pay off your car loan in three years (36 months), and spend no more than 8% of your pretax income on car payments. As we go into depth to determine how realistic this rule is, you may consider whether it can actually help you budget for your next car.

What car can I afford on a $60000 salary? ›

How much should I spend on a car if I make $60,000? If your gross salary is $60,000, your take-home monthly pay is probably around $3,750, assuming about 25% of your pay goes toward taxes and other expenses. Based on the 10-15% calculation, you should spend no more than $562.50 on a monthly car payment.

Is $400 a month too much for a car? ›

It depends on how much income you have after your bills and expenses. But as a rule of thumb, your car payment should not exceed 15% of your post-tax monthly pay. For example, if after taxes, you make the U.S. median income of $37,773, you could shop for a car that costs up to $472 per month.

What is the 50 30 20 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

What car can I afford with a 120k salary? ›

You can comfortably afford a car that is roughly half of your salary, maybe even a little more if you have little other debt. So at 120k you can afford a car up to 60–70k. Honestly depends on your other expenses. If you live way below your means on everything else, you may even be able to afford a 100k car.

What is the income rule for cars? ›

The 20/4/10 Ratio for Car Financing

If you plan to finance your car purchase, follow the 20/4/10 rule: 20% down, loan no longer than 4 years, and keep total car payment – including insurance – to a maximum of 10% of your gross monthly income.

What is too high of a monthly car payment? ›

Your monthly auto loan payments should not exceed 10 to 15 percent of your pre-tax take-home salary. Due to increased vehicle incentives, drivers may find relief when shopping for a vehicle this year. To secure the best deal, work to improve your credit score and consider making a sizeable down payment.

What is a good interest rate for a car for 72 months? ›

Compare 72-Month Auto Loan Rates
LenderStarting APRAward
1. MyAutoloan5.20% for 72-month auto loansBest Low-Rate Option
2. Autopay4.67%*Most Well-Rounded
3. Consumers Credit Union6.39% for 72-month loansMost Flexible Terms
4. PenFed Credit Union6.14% for 72-month loansMost Cohesive Process
1 more row

Is it possible to pay $100 a month for a car? ›

It may be hard to believe, but it is possible to lease a car for under $100 a month. You may have to fork over a ton of cash upfront, but there are options for those looking for a brag-worthy lease deal with an extremely low payment.

How much a month is too much for a car? ›

Ideally, you don't want to spend a week or more of your pay each month on a car note. A good ballpark range is that you should aim to spend no more than 15% to 20% of your income on all transportation costs — and that includes insurance, parking, maintenance, gas to put in the tank, and monthly payments.

Is $800 car payment too high? ›

Experts say your total car expenses, including monthly payments, insurance, gas and maintenance, should be about 20 percent of your take-home monthly pay. For non-math wizards, like me – Let's say your monthly paycheck is $4,000. Then a safe estimate for car expenses is $800 per month.

How much is a $20,000 car payment? ›

For instance, using our loan calculator, if you buy a $20,000 vehicle at 5% APR for 60 months the monthly payment would be $377.42 and you would pay $2,645.48 in interest.

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