How Much Should I Spend On A Car?
Buying a car is an exciting experience, but there are a few things you need to figure out before you start taking test drives. For example, it’s important to establish a budget before you start shopping for a car. This way, you will know what makes and models you can afford to purchase prior to visiting a dealership or browsing online listings.
Setting a budget doesn’t mean figuring out how much you can spend, but rather how much you should spend on a car. Here’s what you need to know to answer the important question of “How much should I spend on a car?”:
Budgeting Methods for Buying A New or Used Car
There are a number of different budgeting methods that experts recommend using when determining how much you can afford to spend on a new or used car. Some of the most popular methods include:
- The 15% Rule
- Half of Your Salary
- The 36% Debt Payment Method
- The 20/4/10 Rule
- The One-Size-Fits-All Rule
- The Penny Pinching Rule
The 15% Rule
Many experts recommend using the 15% rule when setting a budget for a car. This rule states that your monthly car payment should not exceed 15% of your monthly income.
For example, say you take home $4,000 per month after taxes are deducted from your paychecks. According to this rule, you can afford to spend up to 15% of this income, or $600 per month, on a car.
The second part of this rule states that all auto-related expenses, including your monthly payment, gas, insurance, maintenance, and repairs, should not exceed 22% of your monthly income. Using the same example from above, this means you should not spend more than $880 on all of these expenses.
This is a simple and straightforward way to calculate how much you can afford to spend on a car. However, it’s important to note that experts only recommend using this rule if your only debt is a mortgage. If you have other debts, such as student loans or significant credit card balances, you shouldn’t use this rule to set your car budget.
Half of Your Salary
Some experts recommend basing your car budget on your annual salary rather than your monthly income. According to these experts, you can afford to spend up to half of your annual salary on a car.
For instance, the average annual salary in the U.S. is roughly $51,000. According to this rule, someone who makes this salary can afford to spend up to $25,500 on a car regardless of whether they are paying in cash or financing it.
If you are financing a car, make sure you factor in other expenses associated with taking out a loan, including interest payments. Interest can significantly increase the cost of a car, so you need to calculate how much you will pay in interest over the course of the loan to ensure you stay within your budget.
The 36% Debt Payment Method
The next method is a bit more complicated. This method states that you should not spend more than 36% of your monthly income on all of your debt payments. This includes credit cards, mortgages, car payments, and any other form of debt.
Consider the same example from above. If you are making $4,000 per month, you shouldn’t spend more than $1,440 on debt payments. If you are already spending $1,000 on credit cards, student loans, and your mortgage, this means your monthly car payment should not exceed $440.
If you want to use this method, the first thing you need to do is add up your current monthly debt payments. Then, calculate how much more you can spend on a car payment to stay within the recommended 36% limit.
Lenders often use this rule when determining an applicant’s eligibility for a car loan. If your debt-to-income ratio is higher than 36%, you may only qualify for a car loan with a high interest rate.
The 20/4/10 Rule
There is also a group of experts that recommend using the 20/4/10 rule when setting a budget for a car. The 20/4/10 rule states that you should purchase a vehicle with a 20% down payment and a four-year term on your loan. It also states that you should not spend more than 10% of your annual income on your car payments.
Making a down payment of 20% of the purchase price of the vehicle ensures you have equity in your new car as soon as you drive it off of the lot. A down payment of this size can also make it easier to get approved for a loan with more favorable terms.
Of course, this rule only applies to people who plan on financing their new vehicle. If you are paying in cash, you don’t need to worry about calculating a down payment or negotiating the terms of your loan.
The One-Size-Fits-All Rule
The next rule states that you can afford to spend up to 35% of your annual income on a car. Experts who support this rule believe it can be used by anyone regardless of their financial situation, which is why it is often referred to as the “one-size-fits-all rule.”
According to this rule, if you make the average annual salary of $51,000, you can spend up to $17,500 on a car.
It’s easy to calculate your budget using this rule, which is why so many people prefer it. However, unlike other methods, this rule does not factor in your other debts or your down payment on your car. Both of these factors can impact your car budget, so you should always keep them in mind when determining how much you can spend.
The Penny-Pinching Rule
The final method you can use to calculate your car budget is known as the penny-pinching rule. This method is ideal for people who need a new car, but want to spend as little as possible on it.
If money is tight, follow the penny-pinching rule, which states you should not spend more than 10-15% of your annual income on a car. If your annual income is $51,000, this means you should spend between $5,100 and $7,650 on a car.
This is a small budget, so your options may be limited. However, if you’re struggling to make ends meet as it is, following this rule might be the best option for you.
How to Use A Car Affordability Calculator
If you aren’t sure which method to use, you may want to try using a free online car affordability calculator instead.
As its name suggests, a car affordability calculator is a tool that you can use to figure out how much you can afford to spend on a car. To use this tool, all you need to do is enter some basic information about your financial situation.
Every tool is slightly different, so the information you need to provide can vary. For example, you may be asked to provide your annual income, the trade-in value of your vehicle, and your down payment amount. You can use these calculators to figure out how much you can afford to spend in total or on your monthly car payment, depending on whether you are paying in cash or financing.
Keep this information handy when it comes time to buy a new or used car. By following this advice, you can quickly and easily determine how much you can spend on a car.