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How Much Car Can You Afford?

Buying a car is usually a stressful event, but take some of the guesswork out of the process by knowing what you can afford to pay. Then, consider our tips to lower the total cost.

Written by Hilary Collins / August 10, 2022

Quick Bites

  • While there’s no hard and fast rule for what you can afford for a car, you’ll need to take a look at your overall budget to see what you can pay without overextending your finances.
  • To qualify for better interest rates, spend some time improving your credit score before you apply for auto loans.
  • Remember to negotiate with the dealer: They may take up to 20% off the sticker price of a new car.
  • Understand your emotions and put them in the right place before you make any major decisions.

Buying a car has never been a simple task, but in the post-COVID world of backed-up supply chains it’s gotten even tougher. Over the course of 2020 and 2021, the average cost of a new car in the U.S. rose by almost $10,000.[1]

But by making smart choices and doing your research, you can find an excellent vehicle that will get you where you need to go while fitting in your budget. Let’s break down how to know how much you can afford to pay for a car, ways you can maximize what you’re getting for the price and tips for not falling into the emotional traps of car-buying.

Inside this article

  1. Determine what you can afford
  2. Consider the 20/40/10 rule
  3. How to save money on a car
  4. The emotional side of car buying

Determining how much you can afford

First things first, sit down and look at your budget. How much can you realistically spend on a car right now? Remember, your car payment won’t be your only car-related expense—you'll also be shelling out for gas, insurance and maintenance costs. Whether you’re replacing a car or buying your first one, these costs can differ based on the model you choose. For instance, luxury cars will need high-cost specialized maintenance and repairs that won’t crop up with more basic cars, and a large SUV will guzzle more gas than a small sedan.

“Make sure that even with a more significant portion of your income going toward transportation costs, you won't be feeling stretched financially,” says Lindsay Bryan-Podvin, founder of Mind Money Balance, a financial therapy and financial coaching practice.

You can use a calculator like this one from Fidelity or this one from Edmunds to get a sense of what your car payments will look like based on the amount of your down payment, the term of the loan and the interest rate you qualify for. That will help you determine how much you should save and how long you’ll be making payments.

Consider following the 20/40/10 rule

A common rule that pops up when calculating how much car you can afford says that any car purchase you make should include these three things:

  • A down payment of 20% of the total cost or more

  • A loan term of four years or less

  • A total monthly loan payment of 10% or less of your monthly income[2]

While this rule won’t work for everyone and may not always be the best choice, it does point out some smart ways that you can save money and make smart financial decisions when buying a car.

A down payment of at least 20% of the car’s cost is an excellent idea.

“The more you put down, the less interest you'll have to pay, so put down as much as you can without eating into your emergency fund,” Bryan-Podvin notes.

Secondly, since cars are depreciating assets and new cars lose some of their value as soon as they leave the lot, longer loan terms are a bad idea. You’ll not only pay more in interest overall, but you could end up “upside down” on your car loan—that is, owing more to the lender than your car is actually worth at the moment. Imagine making it three years into a six-year loan term only to have your (relatively) new car totalled—and you still have to pay for the remaining three years.

Tip

A depreciating asset is an item that loses value over time, rather than gaining value or even holding steady, like a car or a clothing item. Most of the time, as soon a you drive a new car off the lot or take the tags off a designer jacket, they lose value—and the more you use them, the lower their value drops.

The final component of the rule—the 10% portion—emphasizes the importance of making sure car expenses fit into your financial picture comfortably. According to 2021 research from AAA, the average annual cost of new vehicle ownership is $805.50 per month.[3] That number includes fuel, maintenance, repairs, tires, insurance, license, registration, taxes, depreciation and monthly finance payments. While 10% of your monthly income isn’t a hard and fast rule, make sure that you can afford the car you’re purchasing without overextending yourself.

How to save money on your car purchase

A car is a big purchase, but there are quite a few ways you can both save money and end up with a vehicle you’re happy with. Here are some tips that can help whittle down the total cost:

  • Do your research. This not only includes the budgeting aspects of understanding the costs associated with a car and the limits of your own income, but looking into what kind of car you can afford. Research different makes and models of cars to see what suits your needs and how the prices vary. Use a website like Kelley Blue Book or Consumer Reports to determine the true value of the cars you’re looking for and make sure the ones you’re scoping out are competitively priced.

  • Improve your credit score. Boosting your credit score will help you qualify for auto loans with lower interest rates and more favorable terms. But beware of loans that seem too good to be true, says Bryan-Podvin: “A predatory lender will often entice buyers with poor credit to a time-limited, low-interest loan for a car, only for it to balloon after that period. For example, they might offer 12 months at 4%, only for it to balloon to 20% interest on month 13.”

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  • Seek pre-approved loans. Don’t get sucked into financing your car at the dealership—while some dealerships might offer to finance a car without a credit check, it often means that they’re charging higher interest rates than you might qualify for with a bank, credit union or online lender. Just like any other situation where you borrow money, take the time to get offers from multiple lenders and compare their terms. The Consumer Financial Protection Bureau (CFPB) offers a helpful worksheet that will help you determine which auto loan is best for you.[4]

  • Don’t be too picky. Keep an open mind if you’re looking for a deal and consider going with a used car rather than a new one. “With the preowned car market being pretty intense right now, acting quickly is key to getting a good deal,” says Bryan-Podvin. “So decide on how much you can safely spend; what criteria you need in a vehicle such as age, mileage and condition; and get comfortable letting go of things that matter less, like color.”

  • Don’t get sucked into pricey add-ons. You’re already handing over a chunk of cash, you’re excited about your new ride and you just have to have those heated seats! But wait—some add-ons might be a great idea, but others simply aren’t worth it. Make sure you’re not tacking on costs you can’t really afford for something that you really don’t need.

  • Negotiate with the dealer. Though this obviously doesn't apply to all of them, car salespeople in general have a reputation for being untrustworthy, pushy and generally eager to pull a fast one on you. Gallup notes that car sales is perceived as the least honest and ethical profession—and has been every time they’ve polled on the subject, except the one time it tied with Congress.[5] But if you come in with a pre-approved loan and the knowledge that you can bargain on the price of the car, you can often get a better price and better loan terms. The CFPB notes that dealers are often willing to lower the price of a new car by as much as 20%.[6] That said, there are many alternatives to traditional dealerships these days, such as Carvana and Vroom, where negotiation won’t be necessary.

Managing the emotions around buying a car

While you might think it’s a shady salesperson standing between you and a great car, more often than not the biggest challenge in the car-buying process is you. Making major purchases is stressful as-is, and that’s before you add in the emotional component of car ownership.

Cars? Emotional? Think about it. Have you ever cried when your car broke down at exactly the wrong moment? (Is there ever a right moment?) Have you ever felt a swell of pride because your car shows the world how well your career is going? Have you ever gotten into a debate—or even just had a strong opinion—on electric versus gas-powered cars? Do you cringe at the idea of driving something besides a sports car or a truck—or god forbid, taking the bus?

Perhaps the two dominant—and opposing—emotions you can have when buying a car are what I'll call panic and pride. Panic around car purchases usually follows a common theme that centers around a lack of resources: My car is dying, and I can’t afford a new car, but if I don’t have a working car then I can’t get to my job, and then I can’t afford a new car or anything else for that matter! This panic spiral can lead to knee-jerk or stop-gap decisions that cost you more in the long run.

If you feel like this describes your car-shopping process, you’re far from alone. A study found that 33% of Americans would rather go to the DMV or do their taxes than go through the car-buying process.[7] But one of the things that can help is simply to slow down and take things slowly. Don’t allow your emotions to push you through the process too quickly. You could end up buying a car you can’t really afford, or buying the cheapest car you can find and then finding yourself right back with a broken-down car sooner rather than later.

“Car pride” can be just as big of a stumbling block as car panic. Researchers have actually studied car pride—defined as seeing the car you own or drive as an important component of your social status and personal image—and found, unsurprisingly, that it’s higher in Houston, where most people drive, than in New York City, where most people walk or take public transit.[8]

But what’s wrong with enjoying a nice car? After all, most people will take note of whether you drive a beat-up old junker or the latest Tesla model. The problem comes when you make unwise financial decisions because of the need to impress or the desire for a particular vehicle.

“When it comes to navigating the emotional reasons for purchasing a ‘flashier’ car, crunch the numbers,” Bryan-Podvin says. “Many people look only at the monthly car payment to rationalize a pricier car—‘!t's only $500 per month!’—without considering how much of that payment is interest and how long they'll have to make those payments. And typically, the ‘fancier’ a car is, the more it will cost in maintenance as you'll need to take it to specialty shops for oil changes and upkeep.”

She also advises taking a deeper look at your underlying motivations: “If you are struggling with wanting to buy something because it will look cool, ask yourself what's underneath it. For example, ‘Do I think having this fancy car will signal to others I'm successful? Why do I emphasize external markers of success? In what ways am I already successful that don't have to do with my possessions?’”

Whether you’re dealing with pride, panic, supply chain shortages or an overwhelming amount of options, approaching your car-buying experience thoughtfully will help you end up with a car that gets you where you need to go, fits within your budget and hopefully even makes you feel a little happier when you drive it. After all, even if it’s not a looker, you’ll have the self-satisfied glow of someone who made a wise financial decision.

Article Sources
  1. “Average New Car Price Tops $47,000,” Jan. 14, 2022, Kelley Blue Book. https://www.kbb.com/car-news/average-new-car-price-tops-47000/.
  2. “What Is the 20/4/20 Rule for Car Buying?” May 12, 2022, Capital One. https://www.capitalone.com/cars/learn/managing-your-money-wisely/what-is-the-20410-rule-for-car-buying/1532.
  3. “Sticker Shock: Owning a New Vehicle Costs Nearly $10,000 Annually,” Aug. 19, 2022, AAA. https://newsroom.aaa.com/2021/08/sticker-shock-owning-a-new-vehicle-costs-nearly-10000-annually/.
  4. “Comparing auto loans,” CFPB. https://files.consumerfinance.gov/f/documents/201606_cfpb_auto-loan-worksheet.pdf.
  5. “Congress Retains Low Honesty Rating,” Dec. 3, 2012, Gallup. https://news.gallup.com/poll/159035/congress-retains-low-honesty-rating.aspx.
  6. “Buying a car,” CFPB. https://www.consumerfinance.gov/consumer-tools/educator-tools/buying-a-car/.
  7. “Half of Car Shoppers Say They'd Rather Clean a Toilet Than Buy a Car,” June 2, 2014, Edmunds. https://www.edmunds.com/car-news/half-of-car-shoppers-say-theyd-rather-clean-a-toilet-than-buy-a-car.html.
  8. “Measuring Car Pride and its Implications for Car Ownership and Use across Individuals, Cities, and Countries,” May 10, 2019, Massachusetts Institute of Technology. https://mobility.mit.edu/sites/default/files/MoodyDissertation_electronicversion.pdf.

About the Author

Hilary Collins

Hilary Collins

Hilary is an experienced finance writer with a passion for turning complicated topics into readable stories with real-world takeaways.

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