How Much Car Can You Really Afford? - The Trust (2024)

Let me start by saying I get it. While I am not mechanically inclined, I appreciate a well-appointed ride with some power and handling. And don’t get me started on that new car smell. But I’ve learned over the years through car buying mistakes (my own and others) that over-extending on a car purchase is an easy way to put your budget on its ear and derail other financial priorities. Let’s look at some guidelines you can follow to make sure you don’t bust the budget when buying that next car.

Start With Your Gross Income

To get an idea of how much car you can afford, a good rule of thumb is to pay no more than 35% of your annual pre-tax income. So, if you make $50,000 before taxes per year, your car purchase price should not exceed $17,500. But you can’t buy a new car for $17,500, you may be thinking. You’re right, but you can find a good used car for that amount (more on that later).

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. This will help you to keep your payments and interest costs down while not losing sight of your other financial goals.

  • Put at least 20% down: This will help lower your monthly payments, but it also protects you from the dramatic loss in value new cars experience (another great reason to buy used). A new car can lose up to 19% of its value in the first year alone. If you put less than 20% down, you can owe more than the car is worth almost right away. This can be an issue if you need to sell before the car is paid off or if the car gets totaled in an accident.
  • Term of the loan no more than 4 years: The longer you make car payments, the more interest you pay. Also, if you are making payments, you must meet the requirements for insurance your lender has, which often means paying higher rates. If you can pay off the car in three years, even better! If you must stretch the loan to five years or longer in order to afford the payments, that may be a sign you are buying too much car.
  • Keep total car payment (including interest, principal and insurance) to no more than 10% of your pre-tax income: This will help keep the rest of your budget intact. Having your dream car isn’t worth neglecting your emergency fund, retirement, vacation, or other financial goals. This will also help should your circ*mstances change, like if you lose your job.

Keep in mind this is just a guideline and everyone’s situation is different. Using a car affordability calculator can help you run your numbers and make a wise decision about your vehicle purchase.

Last Thoughts

As you determine how much car you can afford, keep in mind the costs of fuel and maintenance as part of your process. As we touched on, buying used may provide more value and lessen the hit of depreciation compared to new car. Also, make sure you track your credit prior to applying for a car loan to make sure you can get a low rate with lower payments.

Following these guidelines will help you “stay in your lane” when purchasing your next vehicle!

How Much Car Can You Really Afford? - The Trust (2024)

FAQs

How Much Car Can You Really Afford? - The Trust? ›

Start With Your Gross Income

How much car can you really afford? ›

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.

How much you can afford to spend on a car you will need to? ›

The 20/4/10 rule is a general guide to car buying. It advises that you put 20% down on a 4-year auto loan and spend 10% of your salary on transportation costs.

How do people afford $80,000 cars? ›

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.

How much does Dave Ramsey say you should pay for a car? ›

According to a Ramsey Solutions article, if you wonder what type of car you can afford, the answer is simple: “The car you can afford is the car you can pay for in cash.” “And as a general rule, the total value of all your vehicles combined shouldn't be more than half your annual income,” according to the article.

How do you tell how much you can afford for a car? ›

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%.

Is $500 a month for a car good? ›

The average monthly car payment is now a record $733, according to Edmunds. And even if your monthly auto loan payments are around $500 per month, that still may be uncomfortably high. And that's before adding up the cost of maintenance, fuel, and auto insurance.

What is the rule of thumb if you can afford a car? ›

To get an idea of how much car you can afford, a good rule of thumb is to pay no more than 35% of your annual pre-tax income. So, if you make $50,000 before taxes per year, your car purchase price should not exceed $17,500.

How to save for a car in 3 months? ›

For example, if you want to save up $3,000 to buy a car in three months, you would need to save $1,000 per month to make it happen. If you have the flexibility to do so, extending your car-buying timeline can make it easier to save up a larger sum.

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. The savings category also includes money you will need to realize your future goals.

What is a good monthly car payment? ›

In general, it's recommended to spend no more than 10% to 15% of your monthly take-home income on your car payment, and no more than 20% on your total vehicle expenses, including insurance and registration. Read on to learn how you can determine how much car you can afford based on your financial situation.

Is a 350 a month car payment good? ›

Because it's recommended you spend no more than 10% to 15% of your monthly after-tax income on your car payment, your monthly payment will significantly influence the kind of car you can afford. If your monthly take-home pay is $3,500, then that means that your car payment shouldn't exceed $350 to $525.

How much is too much for a 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 the money guys rule on buying cars? ›

The 20/3/8 rule stand for:

20% down. Finance no longer than 3 years. Total car payment is no more than 8% of gross income.

What car is driven by most millionaires? ›

The top 10 car brands driven by millionaires, according to a Ramsey post on X (formerly Twitter) are:
  1. Toyota. The average price for a Toyota went up to $38,198 in the automaker's second quarter of its 2024 fiscal year, according to Carsdirect, citing Cox Automotive data.
  2. Honda. ...
  3. Ford. ...
  4. Lexus. ...
  5. Subaru. ...
  6. BMW. ...
  7. Acura. ...
  8. Hyundai.
Apr 5, 2024

Is it financially better to buy a new or used car? ›

A new car may cost you less in terms of repairs, at least for the first few years. By the time the vehicle starts to need major repairs and upkeep, you may be ready to trade it in. If you pay cash, a used car may cost you more for maintenance but less in interest charges on a loan.

How much car can I afford making $100,000 a year? ›

50% of Your Income Across All Vehicles

Similarly, if your family earns $100,000 per year total, the total value of all of your vehicles shouldn't be worth more than $50,000.

How much car can I afford on an $50,000 salary? ›

If you make a $50,000 gross salary, after taxes (depending on where you live) your monthly take-home pay is roughly $3,230. Based on the 10% rule, you could afford, at most, a $323 monthly car payment. If you take out a 60 month (5 year) auto loan at 8% interest, you can afford a $17,000 car.

How much 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.

What is the 35 rule for cars? ›

The 35% rule states that the most that you should spend. on the price of a car. is not to exceed 35% of your gross income. That means if you make $40,000 a year, the cars price should not exceed $14,000. If you make $80,000, the cars price should be below $28,000.

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