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Budgeting for a new ride? Here’s what you need to know.
Set your budget before you visit a dealership
You don’t want to spend too much of your monthly income on car payments
Don’t forget about additional costs, like taxes, fees, and car insurance
Buying a new car can be complicated — picking out the right make and model, going through the process at a dealership, figuring out how to pay for it — it’s a lot to manage. It’s easy to feel overwhelmed with numbers and lose track of how much you can actually afford to pay for your new ride.
But figuring out how much car you can afford is a simple matter of considering your monthly budget, identifying how much you can pay each month, weighing your car-buying options and researching vehicles in your price range. Here’s what to consider when trying to figure out how much you can afford to pay each month.
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One common rule of thumb when it comes to budgeting for a new car is that you should aim to spend 10% or less of your monthly income on your car loan payment. So if your post-tax take-home pay is $2,500 a month, you should aim to spend $250 or less on your monthly car payment.
Another guideline is the one-third rule. You shouldn’t spend more of your monthly income on debt payments, including car payments, student loan payments or any other debt payments you make regularly. So if your monthly take-home pay is $2,400 you should spend no more than $800 on monthly debt repayment. If you’re already paying a student loan payment of $400 and a credit card debt payment of $120 a month, that means you should spend less than $280 on your monthly car payment.
These aren’t hard and fast rules but they can help you get an idea of how much you can afford to spend on your car. But before you go ahead and make your final budget, there are some other costs and financial factors to weigh.
Car-buying is complicated because there are lots of variables to consider. The amount you can spend on a new car depends on lots of things, including:
Your down payment. The down payment is the amount of cash you pay upfront for a vehicle before a car loan covers the rest. The more you can afford for a down payment, the lower your monthly payments will be.
The trade-in value of your current car. If you have a current vehicle and you’re planning on trading it in when you get your new car, that will help you afford a higher-priced vehicle than if you go into the process without a trade-in. Just make sure to research the value of your current car before you show up at the dealership.
The interest rate of your loan. If you have good credit and shop around for a car loan, you’ll find a lower interest rate than if your credit is poor, or if you don’t comparison shop. A better interest rate will mean you’ll pay less in interest over the life of the loan and may mean you can afford a car with a higher purchase price.
Sales tax and extra fees. When figuring out how much to spend on a car, remember that you’ll also be paying your states’ sales tax and registration fees for a new car, so you’ll be paying more than the advertised price.
Costs of ownership. The spending doesn’t end when you drive your car off the lot. You’ll also have to pay for car insurance and regular maintenance, so be sure to consider that in your budget too.
We’ve mostly talking about how to budget when you’re purchasing a car with the help of a car loan, like many drivers do. But there’s more than one way to get a new or used car.
One option for purchasing a new car is to buy it upfront, without a loan. For many people, this simply isn’t financially possible. But if you can afford to pay cash for an affordable, reliable car, buying one outright means you won’t have to deal with car payments.
If you’re buying your car outright, budgeting is a simple matter of figuring out how much money you have on hand and how much you can reasonably afford to pay for your new car. Remember that even though you won’t have car payments, you’ll still have to pay for car insurance and budget for regular maintenance costs.
Most drivers who buy their cars do so with the help of a car loan. Car loans work much like any other type of secured loan — an institution lends you the money to help you buy a car and you agree to pay them back over a set amount of time.
Shopping around for loans will help you get the best rate possible, which will factor into your budget for your new ride. Weighing your loan options with the other factors we mentioned, like the trade-in value of your current vehicle and the state taxes and fees, will help you calculate how much car you can afford.
Leasing a car is another option altogether. Rather than buying a car, leasing allows you to pay a monthly fee for the use of one, sort of like a long term rental. Leasing a car may mean there are some restrictions on how much you can drive it without paying extra fees, but it also means you can turn it in at the end of your lease without worrying about selling a car that’s lost value.
Lease payments tend to be lower than loan payments, meaning leasing a car allows you to drive a more expensive vehicle than you might otherwise be able to afford. Budget for leasing a vehicle the same way you’d budget for buying a car — consider how much you can afford to pay each month, and factor costs like the down payment, and any fees if you go over your allotted mileage.
However, car payments eventually end once you’ve fully paid off a loan, while lease payments continue for as long as you want to keep driving, which means leasing is more expensive in the long run.
Policygenius’ editorial content is not written by a certified financial planner or advisor. It’s intended for informational purposes only and should not be considered legal, financial, or investment advice. Consult a professional to learn what financial products are right for you.
This post contains references to products or services from one or more of Policygenius' advertisers or partners. While these codes earn us a small fee at no additional cost to you, they do not influence editorial content and we only refer products we love.
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