How Much Should You Spend on a Car?

by Ryan Lane

Unsurprisingly, buying a car is a major financial commitment. That leads many potential car buyers to head to a dealership intent on negotiating the best deal—or at least on not paying for things like undercoating (whatever that is).

However, before you start haggling, you need to answer a much bigger question: Can I afford a car? Addressing this isn’t as fun as taking a test drive, but it’s an equally important part of buying a car. After all, you may not feel so free driving off the lot if you’re shackled to debt, trying to pay for that vehicle.

Risky financing can make it easy to spend too much on a car, which many borrowers do. Loan delinquency rates are rising as well. To help avoid a similar outcome, consider the following when determining how much to spend on a car.

How To Avoid Spending Too Much on a Car

Start with a Budget
Calculate the Total Cost of the Car
Consider the 20/4/10 Rule When Financing
Consider Your Credit
The Bottom Line

Start with a Budget

Of course, truly figuring out what you can afford is tricky. You should consider taking one of a couple different proven approaches when it comes to determining your car budget, whether it’s for a new vehicle or a used car.

First, some shoppers will prefer to build their budget around industry standards. General best-practice advice tends to vary about how much car you can afford on a given annual income level, but most pin the amount for monthly car payments at somewhere around 10% of your monthly take-home pay.

Now, there’s a different way to answer this question as well. Instead of using an industry standard to prescribe a set percentage of your budget, you can look at your existing spending to determine how much you can afford. It could end up being more or less than that 10 to 20%, and that’s fine, depending on your other expenses.

Keep in mind, this option tends to work only for those who already have a strong grasp on their personal finances. If that describes you, you may be better able to create a harmonious budget that accommodates your needs and wants. For instance, if you want a nicer car, accept that you may need to cut costs elsewhere to afford it (unless you plan to live in that car, too). Budgeting is, after all, a balancing act.

Calculate the Total Cost of the Car

Once you determine how you’re going to account for your car cost in your budget, you’ll want to make sure the amount you’re using is accurate. The “sticker price” of your new car won’t be the only thing you’ll pay for right now—or later.

The listed price of a car is just one factor. There are also sales taxes and registration fees, destination charges, and financing charges that get added on top. Any existing debt must be factored in as well. These costs are sometimes rolled into the price quoted by a salesperson—but not always.

A car is not a one-time expense. You’ll need an ongoing line in your budget to account for maintenance costs, gas, car insurance, any repairs not covered by the factory warranty, and other costs, in addition to loan payments. Think about all of these items before you determine your purchase price; this might require you to shop for a less-expensive model than you initially thought you could afford. After all, what good is a new car if you can’t afford to put gas in it?

Looking further ahead, you may also want to consider anticipated depreciation. This can’t be estimated exactly, but it will impact trade-in value when it’s time to purchase your next car. An expensive car can still depreciate fast, so don’t expect the purchase price to determine future value—especially with current volatile car prices.

Consider the 20/4/10 Rule When Financing

If you plan to finance your new car, whether at the dealership or through an outside bank, online lender, or credit union, “20/4/10” is a good rule of thumb. That’s a 20% down payment, an auto loan term of four years or less, and, as mentioned above, a total monthly cost of ownership (including the monthly payment, auto insurance, fuel, maintenance, and any other ongoing costs) that is less than 10% of your monthly take home pay.

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Consider Your Credit

If you choose to finance a vehicle in the future, your credit score will play a big role. It will partially determine how high the interest rate will be on any car loan you receive—or whether you can receive a car loan at all.

Car buyers with bad credit aren’t out of luck. Some simple steps to maintain or improve your credit include paying your bills on time, decreasing your debt, and increasing your available income. Just remember that you can’t magically improve your credit the night before you head into a car dealership. Like a good reputation, good credit is earned over time.

CarGurus encourages all car shoppers to be conservative and careful budgeting for a car purchase. If you practice appropriate spending and budgeting habits, you’ll stand a better chance at having a successful car-buying and car-ownership experience, not to mention being able to get more for your car when it’s time to replace it.

The Bottom Line

Understanding all of the costs involved in a car purchase can help avoid a shock at the dealership and help plan car expenses. Knowing what you can afford is the first step, and every subsequent decision should be based on that. If you’re ready to start shopping, head over to CarGurus’ car-shopping page. If you’re looking for financing, our finance-in-advance page is worth a look as well.

Related Topics

What to Know When Getting a Car Loan
The Beginner’s Guide to Car Insurance
How To Buy a Car with Bad Credit

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Stephen is a freelance automotive journalist covering everything on four wheels. Whether it's a new EV or a full-size pickup truck, he's eager to drive it and tell you all about it in a CarGurus Test Drive Review. Besides contributing to CarGurus, Stephen currently has bylines at Digital Trends, Green Car Reports, and Motor Authority.

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